Income Tax - Chapters 1 - 10
What is the penalty for promoting abusive tax shelters?
$1,000 per occurrence penalty (not to exceed 100% of compensation to preparer)
What is a child's standard deduction?
$1,050 OR $350 + Earned Income, not to exceed $12,000 (2018, increased from $6,350 for 2017 returns)
What is the penalty for conviction of felony fraud?
$100,000 and 3 years imprisonment
What is the penalty for unauthorized disclosure of client information?
$250 per occurrence penalty (not to exceed $10,000 in a calendar year)
Private Letter Rulings can cost $__________________. PLRs are for _____________ transactions. This means that taxpayers request Private Letter Rulings from the IRS before taking the actions they are questioning.
$30,000 or more proposed
What is the penalty for endorsing a taxpayer's refund check
$510 per occurrence (no maximum limit)
What is the penalty for failing to exercise due diligence in claiming certain tax credits?
$510 per occurrence (no maximum limit) (Penalty applies to earned income tax credit, child tax credit, and the American Opportunity Tax Credit)
The failure to pay penalty is ___% of net tax due, calculated monthly. Note that this rate increases to ___% if the tax remains unpaid ___ days after the IRS issues a notice of intent to levy. Furthermore, it is reduced to ___% if payments are being made per an installment agreement with the IRS.
.05% 1% 10 0.25%
Late Tax Payment: _______% monthly of net amount of tax
0.5%
Concurrent months - For any months in which taxpayers have failed to file and failed to pay, the failure to file penalty will be reduced by the ___% failure to pay penalty. This takes the failure to file penalty to ___%, while the failure to pay penalty remains 0.5%. In other words, if a taxpayer both fails to file and fails to pay, the combined monthly penalty is limited to ___% for the months where both are outstanding.
0.5% 4.5% 5%
What are the 7 marginal tax rates?
10% 12% 22% 24% 33% 35% 37%
What are the child ages that result in a Kiddie Tax?
19 or younger (or 23 if a student)
If no return was filed, the taxpayer can file for a refund, with a completed return, no later than ____ years after the tax was paid.
2
Dependency exemptions were temporarily repealed for tax years during the period January 1, 20____, through December 31, 20_____.
2018 through 2025
The failure to pay penalty cannot exceed ___%. Therefore, since the penalty is generally ___% per month, ___ is generally the maximum number of months it will be assessed.
25% 0.5% 50
Each taxpayer penalty is calculated as a percentage of net tax due; neither is to exceed ______%. This means the failure to file penalty is generally not assessed for longer than ______ months, and the failure to pay penalty does not generally exceed ______ months.
25% 5 50
The IRS can generally assess any tax within ______ years from the due date of a taxpayer's return, or within _____ years of filing the return, whichever is later.
3 3
The maximum number of months that a failure to file penalty will be assessed is ___, even if the taxpayer files a return after more than ___ months.
5 5
Late Filing: ______% monthly of net amount of tax
5%
If the taxpayer substantially understates income on the return, the statute of limitations increases to ____ years. Substantial understatement is defined as greater than ____% of the amount stated on the return.
6 25%
If you file your tax return more than ___ days after the due date or extended due date, the MINIMUM penalty for failure to file is the smaller of $___ or ___% of the unpaid tax.
60 $210 100%
What is Tax Avoidance?
An individual has the legal right to minimize tax liability through legal techniques
Imputed income may be received in what 4 ways?
Barter (e.g., trading fur pelts for financial plans) Providing services Forgiving a debt Paying for the benefit of someone to a 3rd party
The security of privileged communication applies only between the taxpayer and what 4 types of personal advisors?
CPA Attorney Enrolled Agents Enrolled Actuaries NOT CFP Practitioners!
Who are the only 4 people who may fully represent taxpayers before the Internal Revenue Service?
CPAs Enrolled Agents Enrolled Actuaries Practicing Attorneys
When is the Surviving Spouse filing status used instead of Head of Household?
Can file Surviving Spouse for 2 years after the death of a spouse, thereby using MFJ rates, if the surviving spouse maintains a household for a dependent child
What are the 4 dividend types that are not "qualified dividends" per the IRS?
Capital gain distributions Dividends paid on deposits paid by banks and savings and loans Dividends from tax exempt organizations or a farmer's cooperatives. Dividends paid by a corporation on employer securities that are held through an employee stock ownership plan (ESOP) maintained by that organization
Bill has a client who would like to take a deduction for the interest on his auto loan. Where would the best place be for Bill to look for guidance on the consequences for both himself and his client in this situation?
Circular 230
This document sets forth the regulations governing practice before the Internal Revenue Service. It affects all individuals who are eligible to practice before the IRS.
Circular 230
What is the best source for obtaining information about the intent of a very recent change in the tax law?
Congressional Committee Reports
Which type of audit? Simple problems Usually resolved by mail
Correspondence Audit
What are the three types of audits?
Correspondence Audit Office Audit Field Audit
What 3 basic tests apply regardless of whether a taxpayer is claiming a qualified child or qualifying relative as a dependent.
Dependent Taxpayer Test - can't be claimed as a dependent by another person Citizen or Resident Test - citizen or resident of U.S, or resident of Canada or Mexico Joint Return Test - can't file a joint return (unless no tax is due but a refund is due)
For taxpayers who want their cases heard by a jury, then ______________ is the only place to go.
District Court
As a taxpayer, what are the options available to you if you receive a tax bill that you do not agree with? Basically, you can take your case to which of three different courts?
District Court - pay the tax and then sue for a refund. Trial by jury. Appeals are to U.S. Circuit Court of Appeals Court of Federal Claims. Appears are to Federal Court of Appeals U.S. Tax Court - poor man's court. no payment until case is heard. Appears are to United States Court of Appeals.
When considering gross income, what are the two types of income?
Economic Income - income that can be produced without a tax consequence (stock raises in value, but isn't sold) Accounting Income - income that can be taxed
items specifically excluded from taxable income. They have specified IRC sections, which range from Code Section 101-139. A few examples would include the receipt of child support, inheritances, and welfare benefits.
Exclusions
What are the 4 violations of Administrative Penalties for PAID preparers?
Failure to provide taxpayer with copy of the completed return. Failure to retain a copy of the return Failure to sign the return Failure to provide the preparer's identifying number
If the basis for the tax claim is more technical in nature, it may be a good idea to have the case heard in __________________.
Federal Claims Court
Which type of audit? Expansive and complex Conducted by revenue agents Done on site of taxpayer
Field Audit
What $ amount will trigger the Kiddie Tax?
For 2018, unearned income greater than $2,100 will be taxed at irrevocable trust income tax rates.
Where is the best place to look to identify the reasoning behind the change of a tax law?
Go to the source (for example, the minutes of the House Ways & Means Committee)
All income received in the form of money, goods, property, and services that are not exempt from tax. It is the broadest measure of income.
Gross income
A qualified dividend must meet the holding period requirement. What is the holding period window?
If the stock was held for more than 60 days in the 121 day period from, 60 days before and 60 days after the ex-dividend date
What does the the Multiple Support Agreement say, in relation to the Support Test for Qualifying Relative deduction?.
If the two can agree that either one who provides more than 10% of the person's support can claim an exception. However, only one may claim the exemption
Is interest charged on any balances due to the IRS?
In addition to the penalty for failure to pay, interest will also be assessed on any balance due.
What are the 3 characteristics of tax evasion?
Intentional Fraud Willful
When arguing cases regarding taxation, what are the 7 best sources to interpret the law?
Internal Revenue Code Treasury Regulations Revenue Rulings Revenue Procedures Private Letter Rulings Determination Letter Technical Advice Memorandum
The ___________________ is the highest authority when it comes to tax laws.
Internal Revenue Code (IRC)
What are the 2 tests for a Qualifying Relative deduction?
Member of the Household or Relationship Test - live with taxpayer entire year OR be related to taxpayer Support Test - provide more than half of a person's total support during the calendar year
3 ways taxes can be avoided?
Minimizing taxes Deferring income recognition Acceleration of deductions
What is another name for the 3.8% Medicare surtax?
Net Investment Income Tax
Which type of audit? Restricted in scope Conducted via a personal interview at IRS site
Office Audit
The IRS has four basic means of selecting persons and businesses for audits.
Random Computer Matching Audit Triggers Target Programs
What are the 5 tests for determining the dependency of a Qualifying Child deduction?
Relationship Test - includes adopted and eligible foster children Age Test - under 19 or 24 (full-time student for 5 months) Residency Test - same principle address for 1/2 year Support Test - child provides less than 1/2 of support Qualifying Child of More than 1 Person
What is the formula for calculating the deductible equivalent of a tax credit?
Tax Credit ÷ Marginal Tax Rate = Deduction Equivalent
Requested by an IRS agent to have a complex tax matter clarified by a supervisor. Only an IRS agent may request one.
Technical Advice Memorandum (TAM)
For tax claims of less than $_________, the tax payer an go to which court instead of the U.S. Tax Court?
The small claims division of the U.S. Tax Court can handle claims less than $50,000. Generally, small tax case proceedings are less formal and result in speedier dispositions than regular trials. Trials are conducted by one judge, without a jury. However, decisions cannot be appealed by the taxpayer or the government.
What are the 3 requirements for information to qualify as privileged information, and thus not required to disclose to the IRS?
The tax advisor must be authorized to represent taxpayers before the IRS, The communications must relate only to noncriminal tax matters*, and The communications must relate directly to the tax advisor's professional duties.
What practice rights do Enrolled Actuaries have before the IRS?
They are limited primarily to practice involving employee retirement plans.
Generally, filing for a refund may be the later of what 2 events?
Three years after the due date of the original tax return, or Two years after the tax was paid.
____________________________ expand upon and explain the IRS Code.
Treasury regulations
T or F? Any calendar month or portion thereof in which the taxpayer is late is considered a full month.
True
If the taxpayer is not able to pay the assessed tax, ______________ is the best solution for a court.
U.S. Tax Court
What are the 2 key penalties paid preparers could face for failing to follow the IRS standards?
Understatement of Tax Liability (2 types) (due to unreasonable positions - $1,000 or 50% compensation due) (due to willful or reckless conduct - $5,000 or 75% of compensation from return or claim. Administrative Penalties - $50 per violation, not to exceed $25,500 in a calendar year
What tax rate is charged to children who have unearned income below $2,100?
Unearned income of $2,100 or less is taxed at the child's marginal tax rates.
What is the IRS' definition of Gross Income?
all income from whatever source derived...
What is Tax Evasion?
an intentional act to defeat the laws of taxation
What are 2 things the tax return preparer can do to verify tax return deductions claimed by the client?
check the client's profession ask for written evidence
The CPA-Client privilege does not extend to what 2 types of tax matters?
criminal tax matters fraudulent tax matters (both ARE privileged information between client and attorney)
What is the final calculation for figuring an individual's tax liability?
deducting any tax credits from the individual's TENTATIVE TAX.
These may be requested by taxpayers and are taxpayer-specific, but may be published by private sources. They apply to completed transactions only.
determination letters
4 of the more important considerations in fulfilling these responsibilities for PAID tax preparers?
discovery of an error (what do to when an error is found after return is filed) client estimate of deductions (verify) taking an aggressive position (try to minimize the tax liability of the client) tax return preparer penalities
What are the 3 primary sources of income that are important to know for completing a tax return?
earned income - earned through labor (employee or self-employed) unearned income alimony
The taxpayer is also subject to penalties for several reasons, the two primary ones being what?
failure to pay (late payment) and failure to file (late filing)
If a spouse dies in February, what status is the surviving spouse?
file MFJ in the year a spouse dies
All deductions found on the front of Form 1040 are deductions "for AGI" or "from AGI" ?
for AGI (above the line deductions)
What are the 2 types of Deductions?
for Adjusted Gross Income - to be used for the computation of Adjusted Gross Income from Adjusted Gross Income - to be deducted after AGI has been computed
What are the two exclusions to this 3-year statute of limitations rule for taxpayers?
grossly understate their income commit fraud or fail to file
When dealing with dividends on preferred stock, what is the holding period to obtain "qualified dividend" tax rates?
held the stock for more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are attributable to periods totaling more than 366 days.
What is the term for the value of any service or benefit that should be considered income for purposes of calculating federal taxes, without ever having received income?
imputed income
Is the Tax Return Preparer or the Financial Planner required to notify the IRS of a discovered error after a return is filed?
inform the client of the error and recommend filing an amendment. not required to notify IRS
Alimony paid under a divorce agreement executed after December 31, 2018, is included in which spouse's gross income?
is neither included in the payee spouse's gross income nor deductible from the payer spouse's gross income.
What is the "basis" of an investment?
it is generally the capital that a person has invested in an item
Qualified dividends are taxed at what rate?
long-term capital gain rates of 0%, 15%, or 20% based upon taxable income.
A qualified dividend must meet what 3 criteria?
paid by a U.S. corporation or a qualified foreign corporation. The dividends are not of types listed by the IRS as unqualified. The taxpayer must meet the holding period requirements
What is the basis used for calculating the 3.8% Medicare surtax (Net Income Investment Tax)?
payable on the lesser of net investment income or adjusted gross income in excess of $200,000 (2018, single filers) or $250,000 (2018, married filing jointly).
What information is not required to be shared with the IRS, even if they demand it?
privileged communications between a taxpayer and the taxpayer's tax advisor
What are the 5 basic filing statuses?
single, joint, married filing separately, head of household, and surviving spouse
Are subtracted after we have calculated our tentative tax. Dollar-for-dollar reductions in the individual's total tax liability
tax credits
Are applied before arriving at the individual's taxable income and are not dollar-for-dollar reductions in an individual's tax liability
tax deductions
What is the Kiddie Tax?
taxes on excess unearned income of a child at irrevocable trust income tax rates
What are the 3 tie-breaker rules for determining the person who claims the Qualifying Child of More than 1 Person (if they can't agree)?
the Parent the Parent with whom the child lived the most during the year the Parent with the highest AGI
What are the chances that a taxpayer will be selected for a random audit?
the chances are less than 1%.
An individual's filing status is determined on what day of the year?
the last day of the year
What is the standard for aggressive practices in minimizing the tax liability of the clients?
the probability of success in court
How long is the statute of limitations if a taxpayer files a fraudulent return or fails to file a return at all?
the statute of limitations is unlimited
If the tax payer goes to the Small Claims Division of the U.S. Tax Court, what are the 3 unique characteristics of the process?
trials conducted by 1 judge only - no jury decisions cannot be appealed less formal and speedier dispositions than regular trials
What is the Recovery of Capital Doctrine?
upon selling an investment, you receive back what you paid for it tax-free.
Why was the Kiddie Tax implemented?
was developed by Congress to prevent parents from shifting unearned income to a child in a lower tax bracket