REG - SU 3

Notice of Deficiency

-90 day letter -prerequisite to assessment

Estate and Trust Tax Return Due Date

-April 15 -an extension of up to 5 1/2 months may be granted by filing form 7004; Sept 30

Individual Tax Return Due Date

-April 15th -an automatic 6 month extension is available by filing form 4868; this extends the deadline to October 15th -the extension does not grant any additional time to pay taxes due

Partnership Tax Return Due Date

-March 15 -an automatic 6 month extension is available by filing form 7004; this extends the deadline to Sept 15

S Corporation Tax Return Due Date

-March 15th -an automatic 6 month extension is available by filing form 7004; this extends the deadline to Sept 15 -extension does not grant any additional time to pay taxes due

Exempt Organizations Tax Return Due Date

-May 15 -form 8868 can be filed to request an automatic 6 month extension if needed; November 15

Fraud

-attempting to evade tax results in an unlimited assessment period -fraud cannot be cured by filing a correct amended return

Legislative Law

-comes from congress as signed by the president, is authorized by the constitution and consists of the IRC and committee reports -internal revenue code of 1986 -committee reports along with the congressional record are useful tools in determining congressional intent behind certain tax laws and helping examiners apply the law properly

Judicial Law

-common law that originates from the federal court system and is primarily comprised of court opinions -court cases are considered a primary authoritative source when conducting tax research -cases from the US tax court and the US district courts are appealed to the appropriate US circuit court of appeals -cases from the US court of federal claims are appealed to the US court of appeals for the federal circuit

Tax Courts

-decisions of the tax court are issued as either regular decisions or memorandum decisions

Tax Liabilities

-must be paid by the original due date of the return -an automatic extension for filing the return does not extend time for payment -interest will be charged from the original due date -failure to file or pay on time results in a penalty based on the unpaid liability (tax liability - prepaid amount) 1. penalty of 5% per month up to 25% of unpaid liability is assessed for failure to file a return; additionally, the minimum penalty for filing a return over 60 days late is the lesser of $435 or 100% of tax due 2. a penalty of 0.5% per month up to 25% of unpaid liability is assessed for failure to pay tax

Kiddie Tax

-net unearned income of a dependent child is taxed to the dependent at rates higher than the child's marginal tax rates -this tax is designed to discourage parents from shifting unearned income to their children with lower tax rates -in tax year 2020, these higher rates are the parents' marginal tax rates

Arm's Length Transactions

-occurs when the involved parties act independently, regardless of any relation -transactions between unrelated parties -if the parties are related, a transaction is considered arm's length if the results of the transaction are consistent with those that would have been realized if unrelated taxpayers engaged in the same transaction under the same circumstances

Qualifying Costs for Household Maintenance

-property tax -mortgage interest -rent -utilities -upkeep -repair -property insurance -food consumed in home

Examples of Child EARNED Income

-salaries -wages -tips -scholarships

Tax Authority Hierarchy

1. US constitution 2. IRC and US supreme court 3. treasury regulation and appellate court opinion 4. US tax, district, and federal claims court opinion 5. revenue ruling and revenue procedure 6. private letter ruling and other

Court System

1. US supreme court 2. US circuit court of appeals and US court of appeals for the federal circuit 3. US tax court and US district court and US court of federal claims

If unable to pay the full liability (doubt as to collectability), the taxpayer may apply for an offer-in-compromise. The IRS considers the taxpayer's

1. ability to pay, 2. income, 3. expenses, and 4. asset equity

The penalty will not be imposed if any of the following apply:

1. actual tax liability shown on the return for the current tax year (after reduction for withholdings and refundable credits) is less than $1,000 2. no tax liability was incurred in the prior tax year 3. the IRS waives it for reasonable cause shown

The penalty for underpayment will not be imposed if any of the following apply:

1. actual tax liability shown on the return for the tax year (after reduction for amounts withheld by employers) is less than $1,000 2. no tax liability was incurred in the prior tax year 3. the IRS waives it for reasonable cause shown

Three key terms when discussing shifting income are:

1. assignment of income doctrine 2. related party transaction 3. arm's length transaction -the purpose of the rules related to these items is to guarantee that all parties act in their own self interest and not for the common good of all parties involved to the detriment of the IRS

US Supreme Court

1. can exercise its discretionary authority to review decisions of the courts of appeals and other federal courts 2. writ of certiorari is an order by the supreme court to hear a case; the courts certiorari jurisdiction (whether the court chooses to hear a case) is purely discretionary; a denial of petition for a writ of certiorari by the supreme court expresses no opinion on the merits of the case, and the previous court's opinion on the case stands 3. if the court determines that various lower courts are deciding a tax issue in an inconsistent manner, it may pronounce a decision and resolve the contradiction

Assessment of Deficiency Process

1. computerized examination or audit 2. 30-day letter 3. notice of deficiency (90-day letter) 4. either pay tax and file refund claim or go to tax court 5. if you pay tax and file refund it goes to US court of federal claims which will go to US court of appeals for the federal circuit or US district court which goes to US circuit court of Appeals and if you go to tax court it goes straight to US circuit court of appeals 6. US supreme court

Tax procedures cover the processes for

1. determining a need to file a tax return 2. collecting tax through estimated payments 3. claiming refunds of taxes paid, and 4. assessing or collecting a deficiency in payment Ta

Successful shifting of income among family members or entities depends on determining the following:

1. income/assets available for shifting 2. best strategy for realizing the shift 3. best recipient of income/asset within the family or entity

Two individuals are treated as legally married for the entire tax year if, on the last day of the tax year, they are:

1. legally married and cohabiting as spouses 2. legally married and living apart but not separated pursuant to a valid divorce decree or separate maintenance agreement, OR 3. separated under a valid divorce decree that is not yet final

Each of the following is treated as prepayment of tax:

1. overpayment of tax in prior tax year, which has not been refunded 2. amounts withheld (by an employer) from wages; the aggregate amount is treated as if equal parts were paid on each due date, unless the individual establishes the actual payment dates 3. direct payment by the individual (or another on his or her behalf) 4. excess FICA withheld when an employee has two or more employers during a tax year who withheld (in the aggregate) more than the ceiling on FICA taxes 5. refundable tax credits

Immediate assessment, i.e., without a notice of deficiency, is allowed for the following:

1. tax shown on a return filed by a taxpayer 2. mathematical and clerical errors in a return 3. overstatement of credits 4. tax for which assessment is waived

Tax refers to the sum of

1. the regular tax 2. AMT 3. self-employment tax 4. household employee tax

The qualifying widow(er) status is available for 2 years following the year of death of the spouse if the following conditions are satisfied:

1. the taxpayer did not remarry during the tax year 2. the widow(er) qualified (with the deceased spouse) for married filing joint return status for the tax year of the death of the spouse 3. maintains a household for the entire taxable year 4. can file a joint return in the tax year of the death of the spouse

Two special rules concerning a qualifying person

1. the taxpayer with a dependent parent qualifies even if the parent does not live with the taxpayer; otherwise the IRS maintains that the qualifying individual must occupy the same household (except for temporary absences) 2. in the case of divorce, the custodial parent of a qualifying child qualifies for head of household status even if the noncustodial parent claims the child as his or her dependent

The mitigation provisions are limited to income tax, not gift, when the following circumstances are met:

1. there is a "determination" for a tax year concerning the treatment of an item of income (tax court decision) 2. on the date of determination, correction of the error must be barred (statute of limitations) 3. there must be a condition necessary for adjustment, i.e., double income (deduction) AND 4. in the proceeding of determination, the successful party must have taken position inconsistent with the position in the closed year

The three most basic and common types of tax planning are:

1. timing of income recognition 2. shifting of income among taxpayers and jurisdictions AND 3. conversion of income among high and low rate activities

Filing status on the first day of the year determines filing status for the entire year.

False

A case decided in a US Circuit Court of appeals may appeal to the US Supreme Court for review.

True

A taxpayer shifting income to the taxpayer's 15-year old child in a lower tax bracket is subject to rules that may limit the benefit of this strategy.

True

Taxes are assessed 90 days after the notice of deficiency is mailed, unless a tax court petition is filed.

True

Concerning fraud, Sec. 7201 reads as follows:

any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than ($250,000) ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution

Federal Tax Law (and the authority to tax)

composed of legislative, administrative, and judicial tax law

Key distinction between avoidance and evasion is

taxpayer "intent" - a taxpayer's intent is called into question when one of the "badges" of fraud is identified; these indicators include understatement of income, improper allocation of income, claiming of fictitious deductions, questionable conduct of the taxpayer, and accounting irregularities

Head of Household filing status

the individual may not file as a qualifying widow(er)

Conflicting Authority

when there are conflicting sources of tax law within the same tier of the hierarchy, the most recent rule or law takes precedence

Net unearned income minus the sum of:

$1,100 (first $1,100 clause) AND the greater of (1) $1,100 of the standard deduction or $1,100 of itemized deductions OR (2) the amount of allowable deductions that are directly connected with the production of unearned income

Failure to File

-S/L period does not commence before a return is filed -when no return has been filed, the assessment period is unlimited

Administrative Law

-a catch-all term for the rules, regulations, and procedures implemented and enforced by the Treasury Department -IRS is a bureau of the Treasury Department -IRS's Office of Chief Counsel writes administrative tax law, and it is approved by the Secretary of the Treasury, which is a Cabinet-level position nominated by the President and confirmed by the US Senate

Head of Household marital status

-a married person does not qualify for head of household status unless the conditions below are satisfied -a married individual who lives with a dependent apart from the spouse qualifies if: 1. he or she files separately; 2. he or she pays more than 50% toward maintaining the household; and 3. for the last 6 months: the spouse is not a member of the household, the household is the principal home of a child of the individual, AND the individual can claim the child as a dependent

Married Filing a Joint Return

-account for their items of income, deduction, and credit in the aggregate 1. a joint return is allowed when spouses use different accounting methods 2. spouses with different tax years may not file a joint return -if a spouse dies and the surviving spouse does not remarry before the end of the tax year, a joint return may be filed

Revenue Procedure

-an official IRS statement that prescribes procedures that affect the rights or duties of taxpayers -primarily address administrative and procedural matters and do not have the force of law, but they may be cited as precedent -rulings and procedures may be the basis for appealing adverse return examinations to the tax court and other federal courts

Revenue Ruling

-an official interpretation of Internal Revenue law as applied to a given set of facts and is issued by the IRS -they are published in internal revenue bulletins to inform and advise taxpayers, the IRS, and others on substantive tax issues -publication of revenue rulings is intended to promote uniform application of tax laws by IRS employees and to reduce the number of letter ruling requests -may be cited as precedent and relied upon when resolving disputes, but they do not have the force and effect of regulations nor are they binding in court -considered a primary authoritative source when conducting tax research

Assessment of Deficiency

-any excess of tax imposed over the sum of amounts shown on the return plus amounts previously assessed (reduced by rebates) -made by recording the liability of the taxpayer in the office of the Secretary of the treasury -computerized examination or audit of a return may result in an IRS examiner proposing an addition to tax; a letter stating the proposal is sent to the taxpayer (30-day letter) -if the taxpayer agrees with the proposed adjustment(s), the taxpayer accepts the changes and pays any deficiency

Internal Revenue Bulletin (IRB)

-authoritative announcement from the IRS concerning IRS rulings and procedures, treasury decisions, executive orders, tax conventions, legislation, court decisions, and other items of general interest -it is published on a weekly basis by the government printing office

Recordkeeping

-books of account or records sufficient to establish the amount of gross income, deductions, credit, or other matters required to substantiate any tax or information return must be kept -records must be maintained as long as the contents may be material in administration of any internal revenue law -employers are required to keep records on employment taxes until at least 4 years after the due date of the return or payment of the tax, whichever is later

A penalty is imposed if:

-by the quarterly date, the total of estimated tax payments and income tax withheld is less than 25% of the required minimum payment for the year -the penalty is determined each quarter -the penalty is not allowed as an interest deduction

Closed Cases

-cases closed after examination will not be reopened to make adjustments unfavorable to the taxpayer except under certain circumstances -qualifying circumstances include evidence of fraud, malfeasance, collusion, concealment, or misrepresentation of a material fact

C Corporation Tax Return Due Date

-changed significantly beginning the 2016 tax year -June 30 Fiscal year: 1. through 2025 original due date is 3rd month - Sept 15 and extended due date is April 15 2. 2026 original due date is 4th month - Oct 15 and extended due date is April 15 -calendar/other fiscal year: original due date is the 4th month and extended is the 10th month

Claims for Refund

-claim for refund of federal income tax overpaid for the current tax year is made by filing a return Form 1040; a refund claim for a prior year is made by filing an amended return (Form 1040X); Form 843 is used to claim a refund of any other tax -application for a tentative carryback adjustment to get a quick refund for carryback of a net operating loss or unused business credit is made on form 1045 (individuals) or form 1139 (corporations); corporations also use form 1139 for carrybacks of net capital losses -claim for refund must be made within the statute of limitations period for refunds; most refund claims must be filed by the later of 3 years from the due date (april 15, plus the filing extension time) or 2 years after the tax was paid

Nonqualifying Costs for Household Maintenance

-clothing -education -medical treatment -life insurance -transportation -vacations -services by the taxpayer -services by the dependent

Married Filing a Separate Return

-each spouse accounts separately for items of income, deduction, and credit -a spouse who uses his or her own funds to pay expenses of jointly owned property is entitled to any deduction attributable to the payments -if one spouse files separately, so must the other -filing separately is required when the spouses have different tax year ends

IRS Publications

-explain the law in plain language for taxpayers and their advisors -typically highlight changes in the law and provide examples illustrating service positions -publications are not binding on the service and do not necessarily cover all positions for a given issue -while a good source of general information, publications should not be cited to sustain a position

Conversion in tax planning

-favorable conversions include converting ordinary income property into capital gain property; the opposite applies for losses -some conversions involve a comparative analysis of minimization of current taxes to minimization of future taxes

Private Letter Rulings (PLR)

-in response to a request for guidance, the IRS may respond in writing to a taxpayer concerning guidance on specific facts and situations -binds the IRS and the taxpayer requesting the ruling may rely on it, but other parties who may have similar circumstances may not rely on the PLR -third parties may not rely upon a PLR as precedent -the IRS sometimes redacts personal information and responds to a request for a PLR with a Revenue Ruling, which becomes binding on all taxpayers and the IRS

Examples of Child UNEARNED Income

-interest -dividends -capital gains -trusts distributions -gifts -debt cancellation -pension/annuities -social security -royalties

Treasury Regulations (proposed, temporary, or final)

-interpretations of the IRC that allow the Treasury Department to implement the IRC -they are authorized and allowed under law by the IRC, making them a primary authoritative source when conducting tax research -the IRS is bound by the regulations because it is a bureau within the Treasury Department -courts are bound to follow them to the extent that the court does not find they conflict with the IRC

A failure to pay penalty:

-is imposed from the due date for taxes (other than the estimated taxes) shown on the return -may offset a failure to file penalty -when an extension to file is timely requested, a failure to pay penalty may be avoided by paying at least 90% of the actual liability by the original due date of the return and paying the remaining balance when the return is filed -exceptions and adjustments to these rules may apply in unique situations

Tax Avoidance

-minimizing tax liability through legal arrangements and transactions -the goal of a business is to maximize profits, and tax avoidance is a key element in obtaining this goal -avoidance maneuvers take place prior to incurring a tax liability

The Internal Revenue Code of 1986

-primary source of federal tax law that imposes income, estate, gift, employment, miscellaneous excise taxes, and provisions controlling the administration of federal taxation -the code is found at title 26 of the united states code (U.S.C.) -as long as it is constitutionally valid, each IRC section is binding on the supreme court and, by default, all other federal courts

Head of Household

-qualifies if he or she satisfies conditions with respect to filing status, marital status, and household maintenance

Technical Advice Memoranda (TAMs)

-requested by the IRS area offices after a return has been filed, often in conjunction with an ongoing examination -similar to a PLR, a TAM is binding on the IRS in relation to the taxpayer who is the subject of the ruling, but other parties who may have similar circumstances may not rely on the TAM

Tax Evasion

-takes place once a tax liability has already been incurred (taxable actions have been completed)

Tax Prepayments and Penalties for Individuals

-the IRC is structured to obtain a large portion of the final tax (after nonrefundable credit) through withholding and estimated tax payments -individuals who earn income not subject to withholding must pay estimated tax on that income in quarterly installments -for a calendar-year taxpayer, the installments are due by April 15, June 15, and September 15 of the current year and January 15 of the following year

Extension

-the S/L period may be extended by an agreement between the taxpayer and the IRS entered into before the S/L expires -each time an extension has been requested (or after expiration if there has been a levy), the IRS must notify the taxpayer that the taxpayer may refuse to extend the period of limitations or may limit the extension to particular issues or to a particular period of time

Shifting in tax planning

-the basics of income shifting typically relate to moving income and therefore the accompanying tax liability from one family member to another who is subject to a lower marginal rate, or moving income between entities and their owner(s) -however, tax planning also involves shifting income from one tax jurisdiction to another with different marginal tax rates -other rules that may limit or otherwise make income shifting difficult include the kiddie tax rules and gift/wealth transfer rules

Timing in tax planning

-the timing technique accelerates or defers recognition of income and/or deductions -the advice most often heard is to defer income and accelerate deductions; this results in the lowest tax liability for the current year -however, in a year in which the taxpayer's rates are lower than the rates will be the following year, it is advisable to do just the opposite -a taxpayer typically has more control over the recognition of some types of income (sale of capital gain property) than a taxpayer has over other types (salaries)

Each installment must be at least 25% of the lowest of the following amounts:

1. 100% (110% for taxpayers whose prior year's AGI exceeds $150,000 ($75,000 for married filing separately)) of the prior year's tax (if a return was filed) 2. 90% of the current year's tax 3. 90% of the annualized current year's tax (applies when income is uneven)

The following items should be considered when evaluating the use of timing techniques:

1. time value of money (can the taxpayer make a higher return on income realized and reinvested this year than the taxpayer can save in taxes by deferring the income to a future date by not selling the capital asset until later?) 2. future (or likelihood of proposed) tax law (will it stay the same or change?) 3. individual circumstances of the taxpayer (a strategy good for one is not necessarily the best strategy for another) 4. doctrine of constructive receipt

If actual tax liability minus taxes withheld by employers is less than $2,500, no penalty will be imposed for underpayment.

False

The IRS is bound by IRS publications.

False

The goal of tax planning is to minimize current tax liability.

False

The period of limitations for a refund claim relating to worthless securities is 3 years from the prescribed return date of the year concerning the worthless securities.

False 7 years

Tax avoidance and tax evasion are illegal arrangements of transaction with the intent to defraud the IRS of taxes owed.

False Tax evasion is illegal, tax avoidance is not and only minimizes the tax liability through legal arrangements and transactions.

A taxpayer who delays income recognition until the following year when reduced tax rates are in effect is taking advantage of a tax planning technique known as income shifting.

False Timing technique

If no tax return was filed, authority to assess tax liability ends 10 years after the return's due date.

False. assessment period is unlimited

A taxpayer whose prior year AGI is less than $150,000 ($75,000 for married filing separately) can avoid underpaying estimated taxes by paying 25% of the total prior year's tax per quarterly installment.

True

The IRS is always bound by the regulations; however, the courts are not.

True

The maximum financial felony penalty for fraud by a noncorporate taxpayer is $250,000.

True

Filing Requirements

an individual must file a federal income tax return if gross income is above a threshold -net earnings from self-employment is $400 or more OR -he or she is a dependent (listed on another person's tax return) with more gross income than the standard deduction or with unearned income over $1,100

Single Filing Status

an individual must file as single if he or she neither is married nor qualifies for widow(er) or head of household status

To maintain a household for federal filing status purposes,

an individual must furnish more than 50% of the qualifying costs, of mutual benefit, of maintaining the household during the tax year

Household maintenance

an individual must maintain a household that is the principal place of abode for a qualifying individual for at least half of the tax year

In contrast to individuals:

corporations (including S corporations) must file an income tax return regardless of gross income

In the case of multiple nations claiming the right to tax an individual or business,

credit (subject to specific laws and treaties) will usually be given by each country for tax paid to the other -this helps to avoid double taxation and encourages international business

Tax Court Memorandum

decision is a report of a tax court decision thought to be of little value as a precedent because the issue has been decided one or more times before

Regular Decisions in tax court

establish precedent either through a new tax matter or unique facts and circumstances for a tax matter that has been previously settled

Assignment of Income Doctrine

holds that a taxpayer cannot avoid tax for income the taxpayer earned by assigning it to another person

Even better than converting property from a high tax rate to a low rate is converting it to:

nontaxable property Examples include: 1. employee benefits, employer-paid medical reimbursement 2. investing in municipal bonds (nontaxable investment interest) 3. convert nondeductible personal expense to a business expense

Tax Cuts and Jobs Act (TCJA)

signed by the president on December 22, 2017, expanded, modified, suspended, repealed, and added new code sections -these revisions and additions affect individuals, businesses, estates, and trusts

In the case of shifting income among tax jurisdictions,

the jurisdictions among which the income is moved could be city, country, or state jurisdictions within the US -in addition, shifting of income also could involve moving the income from US jurisdiction to that of another nation

Qualifying person and time

the taxpayer must maintain a household that constitutes the principal place of abode for more than half of the taxable year for at least one qualified individual who is a qualifying child OR a qualifying relative

How would a business maximize the amount of deductions in the current year related to asset depreciation?

to accelerate the depreciation deduction, the business would utilize MACRS depreciation instead of electing straight line depreciation

Related Party Transactions

transactions that occur between persons (including corporations) that are related to each other in one of the statutorily defined manners for example: members of a family are considered related parties, as are a controlling shareholder and the controlled corporation