13.3 - Tax Planning

Question 1

What are the 4 roles of tax planning?

Answer 1

• Assist individuals and businesses in reaching maximization of after-tax wealth in the most tax-efficient way possible
• Considering alternative treatments
• Projecting tax consequences
• Determining role of taxes in decision making

Question 2

Identify the 3 basic types of tax planning?

Answer 2

• Timing of income recognition
• Shifting of income among taxpayers and jurisdictions
• Conversion of income among high and low rate activities

Question 3

Define “timing” of income recognition as a form of tax planning

Answer 3

• Accelerates / defers recognition of income and /or deductions

Question 4

What is the purpose or goal of accelerating / deferring recognition of income and/or deductions?

Answer 4

• Results in lowest tax liability for the CY

Question 5

What 3 items should be considered in the timing of income recognition?

Answer 5

• Time value of money
  
  • Can taxpayer make a higher return?
• Future tax law
• Individual circumstances of the taxpayer

Question 6

Identify the types of “shifting” transactions that take place as a form of tax planning

Answer 6

• Moving income between entities and their owners
• Shifting income from one jurisdiction to another with different marginal tax rates
• Moving income and the tax liability from one family member to another who is subject to a lower marginal rate

Question 7

Define an arm’s length transaction

Answer 7

• Occurs when involved parties act independently, regardless of relationships

Question 8

What is the purpose of an arm’s lenth transaction

Answer 8

• Guarantee all parties act in their own self-interest and not for common good of all parties to IRS detriment

Question 9

Identify 3 shifting determinants

Answer 9

• Income / assets available for shifting
• Best strategy for realizing the shift
• Best recipient of income / asset within the family or entity

Question 10

How does “shifting” occur in jursidiction shifting?

Answer 10

By the following:

• City
• County
• State
• Country
• Internal / business encouraged by each country given credit for tax paid to the other

Question 11

Define “conversion” as a form of tax planning

Answer 11

• Converting ordinary income property into capital gain property
• Converting property to non-taxable property

Question 12

Provide examples of converting property to non-taxable property as part of a conversion tax plan

Answer 12

• Investing in municipal bonds
• Convert nondeductible personal expense to a business expense
• Employee benefits

Question 13

Define tax avoidance

Answer 13

Minimization of tax liability through legal arrangements & transactions

Question 14

When does tax avoidance normally take place?

Answer 14

• Take place prior to incurring a tax liability

Question 15

Identify 5 actions that constitute tax evasion

Answer 15

• Understatement of income
• Improper allocation of income
• Claiming of fictitious deductions
• Questionable conduct of the taxpayer
• Accounting irregularities

Question 16

When does tax evasion normally take place?

Answer 16

• Takes place once a tax liability has already been incurred

Question 17

What is the key distinction between avoidance and evasion?

Answer 17

intent

Question 18

What class of crime is fraud?

Answer 18

Felony

Question 19

What are the legal consequences of committing fraud?

Answer 19

• Fined not more than $100,000
  
  • $500,000 if a corporation
• Imprisoned not more than 5 years