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Does the IRS provide an amnesty program?

Answer: No. As of yet, no general amnesty program has been offered for the Federal income tax.

A six-year statute of limitations applies to returns

understating income in excess of 25%. (not deductions)

audit unlikely or likely? Homer has yearly AGI of around $70,000 and always claims the standard deduction. He works for a builder installing wallboard in new homes.

unlikely

Is a spouse employed by another spouse subject to FICA?

yes

The tax law provides various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. These provisions can be justified on both economic and equity grounds. T/F?

the supreme court does not hear tax law cases. T/F?

An inheritance tax is a tax on the right to pass property by death. TF?

F An estate tax is imposed on the right to pass property by death.

T/F? In cases of doubt, courts have held that tax relief provisions should be broadly construed against the IRS.

F. what does this even mean????

Which tax is proportional?

FICA, FUTA, something, and something

Most states allow their residents some form of tax credit for income taxes paid to other states. T/F?

Ordinary, every day decisions can carry significant tax implications. T/F?

T/F? Both the national sales tax and the VAT are taxes on consumption. Such taxes impose a larger burden on low-income taxpayers, who must spend a larger proportion of their income on essential purchases.

T/F? Indexation: The IRS makes annual adjustments to certain key tax components to take into account inflation.

T/F? Pay-as-you-go/pay go is another way of describing revenue neutrality.

T/F? Revenue neutrality: Every new tax law that lowers taxes must include a revenue offset that makes up for the loss. (For every dollar lost, a new dollar is gained.)

T/F? The Sunset Prevision Reinstates the law as it existed prior to the tax cut.

The Federal income tax on individuals generates more revenue than the Federal income tax on corporations. T/F?

Under Carlton's will, all of his property passes to Laura, his daughter. No federal estate tax will result upon Carlton's death since his property passes to a family member. TF?

lower property/ad velorem taxes may apply to those over age 65. T/F?

Frank inherits rental property from his uncle which he convers into his personal residence. This change may decrease the amount of ad volorem property taxes levied on the property. T/F?

T. Conversion from rental use to residential should bring about lower ad valorem taxes

The FICA tax (Medicare component) on wages is proportional since the tax due increases as wages increase. T/F?

T. bad dumb question from the quiz.

A mother sells a valuable collection of antiques to her daughter for $1,000. What judicial concept might the IRS invoke to question this transaction?

The Arm's Length Concept

An income tax was first enacted by who when?

The English colonists in 1634 in the Massachusetts Bay Colony. The Federal government adopted it in 1861 to fun the Civil War and then after, the tax was repealed.

Who is FICA imposed on?

The employer and the employee

Both the national sales tax and the VAT are taxes on consumption. Such taxes impose a larger burden on low-income taxpayers, who must spend a larger proportion of their income on essential purchases. How could this shortcoming be remedied in the case of a national sales tax?

The regressive effect might be partly remedied by granting a credit or rebate on purchases by low-income taxpayers

For tax year 2010, the IRS assesses a deficiency against David for $500,000. a. Disregarding the interest component, what is David's penalty if the deficiency is attributable to negligence is

$100,000 = 20% × $500,000

Nathan and Diana are husband and wife and have three married children and seven minor grandchildren. For tax year 2013, what is the maximum amount they can give to the family (including the sons- and daughters-in-law) without using any of their unified transfer tax credit?

$364,000

For tax year 2010, the IRS assesses a deficiency against David for $500,000. Disregarding the interest component, what is David's penalty if the deficiency is attributable to civil fraud is

$375,000 = 75% × $500,000

The ratification of the Sixteenth Amendment to the U.S. Constitution was necessary to validate the Federal income tax on corporations. T/F?

Adam Smith's canons of taxation:

-Equality -Convenience -Certainty -Economy

Kara files her income tax return 64 days after the due date of the return without obtaining an extension from the IRS. Along with the return, she remits a check for $15,400, which is the balance of the tax she owes. Assume 30 days in a month. Disregarding the interest element, what are Kara's penalties for failure to file and for failure to pay?

-Failure to pay penalty (0.5% x $15,400 x 3 months) = $231 -Failure to file penalty (5% x $15,400 x 3 months) = $2,310

failure to pay:

.5% each month up to a max of 25%

Types of Audits:

1. Correspondance: minor issue, just one thing 2. Office audit: conducted in an IRS office. minor in scope 3. field audit: looks at numerous items on the return and held on the premise of the taxpayer or the taxpayer's representative.

21. Elijah and Anastasia are husband and wife who have five married children and nine minor grandchildren. For 2013, what is the maximum amount they can give to their family (including the sons- and daughters-in-law) without using any of their unified transfer tax credit?

19 * 14,000 * 2 - 532,000

How much is the negligence penalty

20% if any underpayment was for intentional disregard without intent to defraud

Danny and Frannie are husband and wife and have three married children and three minor grandchildren. If they elect to split the girts, how much can they give their family including sons and daughters in law during 2012 and 2013 without making a taxable gift?

2012: (13,000+13,000) * 9 = $234,000 2013: (14,000+14,000) * 9 = $252,000

failure to file penalty:

5% each month with a max of 25%. The failure to file penalty is reduced by the amount of the failure to pay

how much is the fraud penalty?

75% of the underpayment

DO WE NEED TO KNOW THE AMOUNTS EXEMPT FOR ESTATE AND INHERITANCE TAX? PG 1-12. kind of dumb numbers

Adam Smith's canons of taxation: Economy

A good tax system involves only nominal collection costs by the government and minimal compliance costs on the part of the taxpayer

proportional versus progressive tax

A tax is proportional if the rate of tax remains constant for any given income level. The tax is progressive if a higher rate of tax applies as the tax base increases.

Adam Smith's canons of taxation: Certainty

A tax structure is good if the taxpayer can readily predict when, where, and how a tax will be levied

Equity, Economic, Social, or Political consideration? The deduction for personal casualty losses is subject to dollar and percentage limitations.

Administrative feasibility. The limitation reduces the number of casualty and theft losses that can be claimed and thereby eases the audit burden on the IRS.

Adam Smith's canons of taxation: Convenience

Administrative simplicity has long been valued in formulating tax policy. Tax should be easily assessed and collected. The withholding pay-as-you-go system is of convenience to the taxpayers

Which of the following is not one of Adam Smith's canons of taxation? 1. Certainty 2. Equality 3. Convenience 4. Economy 5. All of the above

All of the above options are canons of taxation that Adam Smith Advocated

Could an amnesty program be used by a state that does not levy an income tax?

Answer: Yes. Amnesty provisions can apply to taxes other than income taxes (for example, sales, franchise, or severance).

he income tax return for 2012 was filed on March 3, 2013, The three-year statute of limitations will begin to run on

April 15th 2013

The income tax return for 2012 was filed on August 13, 2013. The statute of limitations will begin to run on

August 13, 2013

Adam Smith's canons of taxation: Equality

Each taxpayer enjoys fair or equitable treatment by paying taxes in proportion to his or her income

Equity, Economic, Social, or Political consideration? An election that allows certain corporations to avoid the corporate income tax and pass losses through to their shareholders.

Economic justification. Known as the Selection, the provision encourages small businesses to operate in the corporate form without suffering all of the tax disadvantages.

Equity, Economic, Social, or Political consideration? Favorable treatment accorded to research and development expenditures.

Economic justification. Research and development activities are encouraged by allowing immediate or faster write-off of these expenditures.

Equity, Economic, Social, or Political consideration? A deduction allowed for income resulting from U.S. production (manufacturing) activities.

Economic justification. The justification for the domestic production activities deduction is to stimulate the U.S. manufacturing industry. By providing a limitation on the source of the wages involved, it will also encourage job growth.

Equity, Economic, Social, or Political consideration? A tax credit allowed for the purchase of a motor vehicle that operates on an alternative (i.e., nonfossil fuels) fuel source.

Economic justification. The tax law addresses the energy crisis—in terms of both reliance on foreign oil and the need to ease the problem of global warning.

Equity, Economic, Social, or Political justification? A tax credit allowed for electricity produced from renewable sources.

Economic justification. The tax law addresses the energy crisis—in terms of both reliance on foreign oil and the need to ease the problem of global warning.

Edward leases real estate to Janet for a period of 20 years. Janet makes capital improvements to the property. When the lease expires, Edward reclaims the property, including the improvements made by Janet. Under current law, at what point (if any) does Edward recognize income as a result of Janet's improvements?

Edward recognizes income associated with the improvements when he disposes of the property. THIS LAW HAS NOT ALWAYS BEEN TRUE. WHEREWITHAL-TO-PAY concept. The tax law was amended to provide that a landlord does not recognize any income either when the improvements are made (unless made in lieu of rent) or when the lease terminates. Therefore, Edward recognizes income associated with the improvements when he disposes of the property (including the improvements).

Equity, Economic, Social, or Political consideration? A deduction for state and local income taxes.

Equity considerations—To alleviate the effect of multiple taxation of the same income.

Shawn's business warehouse is destroyed by fire. As the insurance proceeds exceed the basis of the property, a gain results. If Shawn shortly reinvests the proceeds in a new warehouse, gain must be recognized due to the application of the wherewithal to pay concept. T/F?

T/F? Both the national sales tax and the VAT are taxes on production that would benefit low-income taxpayers, since the taxes are intended to replace the Federal income tax.

T/F? Indexation: Some of the more important components that are adjusted include: tax brackets and standard deduction but they do not include personal and dependency exemptions.

T/F? Pay-as-you-go/pay go is a proposal to have taxpayers pay the tax they owe as they earn each dollar of income.

T/F? Revenue neutrality: Taxpayers who earn the same amount of income pay the same amount of tax.

T/F? The Sunset Prevision Maintains the law in place until Congress has an opportunity to review it and determine whether it should remain in effect.

43. Isabella files her income tax return 35 days after the due date of the return without obtaining an extension from the IRS. Along with the return, she remits a check for $40,000, which is the balance of the tax she owes. Disregarding the interest element, what are Isabella's penalties for failure to file and for failure to pay?

Failure to pay: .5% * 40,000 * 2 months = $400 Failure to file: 5% * 40,000 *2 = $4,000 - $400 FtP credit = $3,600

The Federal income tax is more progressive today than it's ever been. T/F?

False. Currently, the Federal income tax has six rates. At one time, it had 15.

41. Brianna, a calendar year taxpayer, files her income tax return for 2012 on February 1, 2013. Although she makes repeated inquiries, she does not receive her refund from the IRS until May 28, 2013. Is Brianna entitled to interest on the refund? Explain.

IRS has 45 days to pay you, but I think Cosentino said that they don't have to pay interest to you.

Serena operates a lawn maintenance service in Southern California. As most of her employees are itinerant, they are paid on a day-to-day basis. Because of cash-flow problems, Serena requires her customers to pay cash for the services she provides. Is this a tax problem: Is she allowed to hire transient workers?

No, not a tax problem. Employers may hire transient workers; however, that does not excuse them obtaining the necessary employee documentation.

A question on a state income tax return asks the taxpayer if he or she made any out-of-state Internet or mail-order catalog purchases during the year. The question requires a yes or no answer, and if the taxpayer answers yes, the amount of such purchases is to be listed. Does such an inquiry have any relevance to the state income tax?

No. In such cases, the consumer has an obligation to pay the state an equivalent use tax

If Jim refuses to file for 2009, should you prepare returns for 2010 through 2012?

No. You cannot correctly reflect the tax liability due to the omission for 2009.

Political considerations

Of significance in this regard are tax provisions that represent special interest legislation, reflect political expediency, and exhibit the effect of state and local law. tax proposals rise and fall in favor with the shifting moods of the American Public.

what are the two components of FICA?

Socail Security and Medicare

Equity, Economic, Social, or Political consideration? The deduction allowed for contributions to qualified charitable organizations.

Social justification. The charitable deduction helps fund private organizations and causes that are operated in the interest of the general welfare. This relieves government of the need for considerable public funding.

Which states don't impose an income tax?

South Dakota, Nevada, Florida, and Alaska

A diminishing number of states allow a deduction for Federal income taxes paid. T/F?

An estate tax is imposed on the right to pass property by death. TF?

By "decoupling," a state decides not to allow a particular Federal provision (e.g., exclusion, deduction, credit) for state income tax purposes. T/F?

For state income tax purposes, "piggyback" means making use of what was done for Federal income tax purposes. T/F?

national sales tax is an example of a regressive tax. T/F?

True

The Revenue Act of 1913

Under this act, the Form 1040 was due on March 1, 1914. The law allowed various deductions and personal exemptions and rates ranged from 2% to 6% (for incomes in excess of $500,000).

Serena operates a lawn maintenance service in Southern California. As most of her employees are itinerant, they are paid on a day-to-day basis. Because of cash-flow problems, Serena requires her customers to pay cash for the services she provides. Is she allowed to pay the workers day-to-day? Is this a tax problem: Are her workers considered employees (subject to FICA and FUTA), casual laborers, or independent contractors?

Yes, a tax problem. If Serena is treating the workers as employees, she must comply with the FICA and income tax withholding rules. In addition, she will have to pay FUTA taxes and issue W-2 forms.

Yes, employers can pay workers daily, weekly, biweekly, or monthly. Will this result in a tax problem? No.

statute of limitations:

a provision in the law that offers a party defense against a suit brought by another party after the expiration of a specified amount of time.

A use tax is an ad velorum tax usually at the same rate as

a sales tax on the use, consumption, or storage of tangible property purchased outside the state but used in the state. The purpose is the prevent the avoidance of sales tax. For items such as cars, the tax will probably just be collected when the purchaser registers the item in his or her home state.

Severance tax

a tax is imposed when the natural resources are extracted

Personality can be defined as

all assets that are not realty. Jewelry and household furnishings

equity considerations

alleviate multiple taxation. postpone recognition of gain when the taxpayer lacks the ability to pay. wherewithal to pay concept

gift tax

an excise tax levied on the right to transfer property during the owner's life, not death. The gift tax is measured by the FMV of the property of the transfer less the annual exclusion per donee. each spouse is allowed $14,000 tax free gifting (gift splitting).

Many states have occasionally adopted amnesty programs that allow taxpayers to pay back taxes with reduced penalties. Besides the revenue generated, why are these programs advantageous?

because the expose taxpayers who were previously unknown to the taxing authority. Some states have occasionally instituted amnesty programs that allow taxpayers to pay "back taxes" (and interest) on unreported income with no (or reduced) penalty.

Equity considerations can be used to justify: a. the treatment of gain resulting from an involutary conversion b. The installment sales rules c. The NOL carryover and carryback rules d. The deduction for state and loxal income taxes e. all of the options

d. all of the options

upon learning of an error on a past return, only advise the client to correct it,

don't tell the IRS. just consider withdrawing if it's material and he won't fix it.

in a common law system

each spouse owns whatever he or she earns. In a community property system, one half of the earnings of each spouse is considered owned by the other spouse. Only 9 states, including CA are community property systems.

economic considerations

effort to accomplish economic objectives. use tax legislation to amend the IRS in ways to help control the economy and or encourage certain activities and businesses

Pay-as-you-go income tax system requires

employers to withhold for taxes a specified portion of an employee's wages. Persons with income from other sources are required to make quarterly estimated payments through the year.

revenue neutrality, also referred to as the pay-as-you-go concept means that

every new tax law that lower taxes must include a revenue offset to make up for the loss

19. Jake (age 72) and Jessica (age 28) were recently married. To avoid any transfer taxes, Jake has promised to leave Jessica all of his wealth when he dies. Is Jake under some misconception about the operation of the Federal gift and estate taxes? Explain.

gifts to spouses aren't ever taxed

As the value of your car goes down, your vehicle registration (ad velorem tax) will

go down as well

a tax rate is progressive

if a higher rate of tax applied as the base increases. The Federal income tax, gift tax, and estate tax are progressive

flat tax to replace current income taxes:

imposed at a single rate of 17%. Large personal exemptions would allow many low and middle-income tax payers to pay no tax at all. Al other deductions would be eliminated and no tax would be imposed on income from investments. SIMPLICITY is a major advantage

a flat tax

imposed at income at one rate

excise tax

imposed on a specific item, such as tobacco. Can be used to influence social behavior, such as a tax on gas to encourage people to buy more fuel-efficient cars.

Unlike the Social Security portion of FICA, there is/is no dollar limit on the imposition of Medicare tax

is not. The Medicare portion of FICA is applied at a rate of 1.45 percent and, unlike Social Security, is not subject to any dollar limitation.

Audit likely or unlikely? As a result of a jury trial, Linda was awarded $3.5 million because of job discrimination. The award included $3 million for punitive damages.

likely

audit unlikely or likely? Bernard is the head server at an upscale restaurant and recently paid $1.8 million for a residence in an exclusive gated community.

likely

audit unlikely or likely? Cindy, a former vice president of a bank, has been charged with embezzling large sums of money.

likely

audit unlikely or likely? Giselle is a cocktail waitress at an upscale nightclub. She has been audited several times in past years.

likely

audit unlikely or likely? Gloria lost a Form 1099-DIV that she received from a corporation that paid her a dividend.

likely

audit unlikely or likely? Guy, a professional gambler, recently broke up with his companion of 10 years and married her teenage daughter.

likely

audit unlikely or likely? Jayden, a self-employed trial lawyer, routinely files a Schedule C (Form 1040) that, due to large deductions, reports little (if any) profit from his practice.

likely

audit unlikely or likely? Marcus was recently assessed a large state income tax deficiency by the state of California for his utilization of an abusive tax shelter.

likely

audit unlikely or likely? Mel operates a combination check-cashing service and pawnshop.

likely

One of the most common changes in circumstance that can affect the tax position of an individual is

marital status. Getting married, although usually favorable, can have negative tax results.

Is the statute of limitations the same for refunds and deficiencies?

If an income tax return is not files by a taxpayer, there is

no statute of limitations on assessments of tax by the IRS

Does the federal government impose an inheritance tax and an estate tax?

no, only an estate tax. However some states might levy an inheritance AND estate tax.

Does FICA cover a 14 year old child who works for his or her parents?

no, the child is not covered

The distinction between sales tax and excise tax is easy to make:

one is restricted to a particular transaction while the other covers a multitude of transactions

Value added tax

one of the two proposals to replace the federal income tax. VAT taxes the increment in value as the goods move through production and manufacturing stages to the marketplace. PAID BY THE PRODUCER AND REFLECTED IN PRICE. NOT PAID DIRECTLY BY CONSUMER

national sales tax

possibility to replace the federal income tax. It would be collected on final sale of goods and services PAID BY THE CONSUMER. critics contend that both forms of consumption taxes , both the NST and the VAT impose more of a burden on lower-income taxpayers who must spend larger portions of the income on essential purchases.

proportional or progressive? federal corporate income tax

progressive

proportional or progressive? federal gift tax

progressive

are gift taxes progressive or proportional?

progressive.

property owned by the federal government is exempt from

property tax

ad velorem taxes

property taxes. They are based on value. Property taxes are a tax on wealth or capital

proportional or progressive? Federal excise tax on cigarettes

proportional

proportional or progressive? social security tax

proportional

realty

real estate and any capital improvements that are classified as fixtures. Fixtures are things so permanently attached to the real estate that its removal will cause irreparable damage, such as a built in bookcase.

wherewithal to pay concept

recognizes the inequity of taxing a transaction when the taxpayer lacks the means. such as casualty and involuntary conversion.

Tax considerations should not control, but they should

remain one of the many factors to be considered when deciding things like where to locate a new factory

transaction taxes:

sales tax and excise tax and severance tax

FICA (SS tax) offers

some measure of retirement security. It involves SS tax AND Medicare

FUTA (unemployment tax) offers

some modest source of income in the event of loss of employment

social considerations

some provisions of the federal tax law, particularly those dealing with the income tax of individuals, can be explained by social considerations. health plans financed by employers aren't taxable to the employee. premiums paid by employer on group life insurance aren't taxable to the employee. charity deductions. credit is allowed for amounts to furnish care for disabled dependents. tax deduction for education. no deduction allowed for fines or penalties

bunching

taking itemized deductions in different years

Value added tax

taxes the increment in value as goods move through the production and manufacturing stages to the marketplace

If a special agent joins the IRS or takes over, it means that

the IRS suspects fraud

tax base

the amount to which the tax rate is applied. In the case of Federal income tax, the tax base is taxable income.

8. Several years ago Ethan purchased the former parsonage of St. James Church to use as a personal residence. To date, Ethan has not received any ad valorem property tax bills from either the city or the county tax authorities. What is a reasonable explanation for this oversight?

the government still thinks it's a church and churches don't have to pay ad velorem taxes

An inheritance tax divides heirs into classes based on their relationship to the decedent. The more closely related to the heir,

the lover the rates imposed and the greater exemption allowed

A tax is proportional if

the rate of tax remains constant for any given income level

Franchise tax

the right to do business in a state

estate tax (an excise tax):

the right to pass property at death

inheritance tax (an excise tax):

the right to receive property from a decedent

Property taxes on reality are exclusively used by the state or the fed?

the state

If a fraudulent return is filed or if a return is never filed,

the statue of limitations never expires

The income tax return for 2012 was never filed because the taxpayer thought no additional tax was due. What happens to the statute of limitation?

the statute of limitations will not begin to run?

The income tax return for 2012 was prepared on March 31, 2013, but was never filed. Through some misunderstanding between the preparer and the taxpayer, each expected the other to file the return. What happens to the statute of limitation?

the statute of limitations will not begin to run?

The three-year statute of limitations applies to

timely filed returns reporting substantially proper amounts of income and deductions

25. Mike Barr was an outstanding football player in college and expects to be drafted by the NFL in the first few rounds. Mike has let it be known that he would prefer to sign with a club located in Florida, Texas, or Washington. Mike sees no reason why he should have to pay state income tax on his player's salary. Is Mike under any delusions? Explain.

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