3 Federal Tax Authority, Procedures, and Individual Taxation

Question 1

What is federal tax law?

Answer 1

Federal tax law, and the authority to tax, is composed of legislative, administrative, and judicial tax law.

Question 2

What processes are covered by tax procedures?

Answer 2

1. Determining a need to file a tax return
2. Collecting tax through estimated payments.
3. Claiming refunds of taxes paid
4. Assessing or collecting a deficiency in payment

Question 3

What is tax planning?

Answer 3

The continuous process of analyzing options available for a business or individual that will minimize tax liabilities but is done in a way that maintains the overall objective of maximizing after-tax income.

Question 4

What options are included in tax planning?

Answer 4

• timing of income
• shifting income
• conversion of income property

Question 5

What is a critical aspect of tax planning?

Answer 5

Distinguishing between tax avoidance and tax evasion.

Question 6

What is filing status?

Answer 6

Filing status determines the amount of the standard deductions, applicable tax rates, and threshold amounts for various deductions and credits.

Question 7

Who can be a dependent?

Answer 7

A qualifying child or a qualifying relative

Question 8

What is the authority hierarchy?

Answer 8

1. U.S. Constitution
2. IRC & U.S. Supreme Court
3. Treasury Regulation & Appellate Court Opinion
4. U.S. Tax, District, & Federal Claims Court Opinion
5. Revenue Ruling & Revenue Procedure
6. Private Letter Ruling & Other

Question 9

What is conflicting authority?

Answer 9

When there are conflicting sources of tax law within the same tier of the hierarchy

Question 10

How is authority determined in a situation of conflicting authority?

Answer 10

The most recent rule or law takes precedence

Question 11

What is legislative law?

Answer 11

Legislative law comes from Congress as signed by the President, it is authorized by the Constitution and consists of the IRC and committee reports.

Question 12

What is the primary source of federal tax law?

Answer 12

The Internal Revenue Code of 1986

Question 13

What does the Internal Revenue Code of 1986 do?

Answer 13

It imposes income, estate, gift, employment, miscellaneous excise taxes, and provisions controlling the administration of federal taxation.

Question 14

Where is the IRC found?

Answer 14

It is found at Title 26 of the United States Code (U.S.C.)

Question 15

How is the IRC applied?

Answer 15

As long as it is constitutionally valid, each IRC section is binding on the Supreme Court and, by default, all other federal courts.

Question 16

How are Committee Reports and the Congressional Record useful tools regarding IRC?

Answer 16

They are useful in determining Congressional intent behind certain tax laws and helping examiners apply the law properly.

Question 17

What is administrative law?

Answer 17

A catch-all term for the rules, regulations, and procedures implemented and enforced by the Treasury Department.

Question 18

What is the IRS?

Answer 18

Internal Revenue Service - A bureau of Treasury Department

Question 19

Who writes administrative tax law?

Answer 19

The IRS’s Office of Chief Counsel

Question 20

Who approves administrative tax law?

Answer 20

The Secretary of the Treasury - a cabinet-level position nominated by the President and confirmed by the U.S. Senate

Question 21

What are Treasury Regulations?

Answer 21

Interpretations of the IRC that allow the Treasury Department to implement the IRC. They can be proposed, temporary, or final. They are authorized and allowed under law by the IRC, making them a primary authoritative source when conducting tax research.

Question 22

Why is the IRS bound by Treasury Regulations?

Answer 22

Because it is a bureau within the Treasury Department

Question 23

When are courts bound to follow Treasury Regulations?

Answer 23

Courts are bound to follow them to the extent that the court does not find they conflict with the IRC.

Question 24

What is a revenue ruling?

Answer 24

An official interpretation of Internal Revenue law as applied to a given set of facts and is issued by the Internal Revenue Service.

Question 25

How are revenue rulings communicated?

Answer 25

They are published in Internal Revenue Bulletins to inform and advise taxpayers, the IRS, and others on substantive tax issues.

Question 26

What is the intention of publication of revenue rulings?

Answer 26

To promote uniform application of tax laws by IRS employees and to reduce the number letter ruling requests

Question 27

How are revenue rulings used?

Answer 27

They 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 on a court. They are considered a primary authoritative source when conducting tax research.

Question 28

What is a revenue procedure?

Answer 28

An official IRS statement that prescribes procedures that affect the rights or duties of taxpayers. They primarily address administrative and procedural matters and do not have the force of law, but they may be cited as precedent.

Question 29

How may revenue rulings and revenue procedures be used for appealing adverse return examinations?

Answer 29

They may be the basis for appealing adverse return examinations to the tax court and other federal courts.

Question 30

What is a private letter ruling?

Answer 30

In response to a request for guidance, the IRS may respond in writing to a taxpayer concerning guidance on specific facts and situations. This Private Letter Ruling (PLR) 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.

Question 31

May third parties rely on a PLR as precedent?

Answer 31

NO

Question 32

How does the IRS sometimes use PLRs to create a Revenue Ruling?

Answer 32

They redact the personal information, and instead responds with a request for a PLR with a Revenue Ruling, which becomes binding on all taxpayers and the IRS.

Question 33

What are Technical Advice Memoranda (TAMs)?

Answer 33

These are requested by IRS area offices after a return has been filed, often in conjunction with an ongoing examination. 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.

Question 34

What is the Internal Revenue Bulletin (IRB)?

Answer 34

The 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.

Question 35

What are IRS Publications?

Answer 35

They highlight changes in the law and provide examples illustrating Service positions. They explain the law in plain language for taxpayers and their advisors. Publications are not binding on the Service and do not necessarily cover all positions for a given issue.

Question 36

What is judicial law?

Answer 36

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.

Question 37

What is the hierarchy of the court system?

Answer 37

1. Appellate Courts
   - U.S. Supreme Court
   
   • U.S. Circuit Court of Appeals and U.S. Court of Appeals for the Federal Circuit
2. Trial Courts of origin
   - U.S. Tax Court, U.S. District Court, & U.S. Court of Federal Claims

Question 38

What are the two types of decisions that are issued by the Tax Court?

Answer 38

regular decisions and memorandum decisions

Question 39

What is a regular decision?

Answer 39

A regular decision establishes precedent either through a new tax matter or unique facts and circumstances for a matter that has been previously settled.

Question 40

What is a Tax Court memorandum?

Answer 40

A Tax Court memorandum decision is a report of a Tax Court decision thought to be of little value as precedent because the issue has been decided one or more times before.

Question 41

What cases may be heard in the Small Tax Case Division?

Answer 41

Any case of $50,000 or less, this division’s decision will not be reviewed by (or appealed to) any other court.

Question 42

What cases are appealed to the U.S. Circuit Court of Appeals?

Answer 42

U.S. Tax Court and U.S. District Court cases

Question 43

What cases are appealed to the U.S. Court of Appeals for the Federal Circuit?

Answer 43

Cases from the U.S. Court of Federal Claims

Question 44

What is the U.S. Supreme Court?

Answer 44

The U.S. supreme Court can exercise its discretionary authority to review decisions of the courts of appeals and other federal courts.

Question 45

What is a writ of certiorari?

Answer 45

An order by the Supreme Court to hear a case.

Question 46

What is the Supreme Court’s certiorari jurisdiction?

Answer 46

The jurisdiction whether the court chooses to hear the case, it is purely discretionary.

Question 47

What happens if a petition for a writ of certiorari is denied?

Answer 47

If the Supreme Court denies a petition for a writ of certiorari, it expresses no opinion on the merits of the case, and the previous court’s opinion on the case stands.

Question 48

What happens if the Supreme Court determines that various lower courts are deciding a tax issue in an inconsistent matter?

Answer 48

It may pronounce a decision and resolve the contradiction

Question 49

What happens when a revenue ruling conflicts with a revenue procedure?

Answer 49

When there are conflicting sources of tax law within the same tier of the hierarchy, the most recently established rule/law takes precedence.

Question 50

How is the IRC structured to obtain taxes?

Answer 50

The IRC is structured to obtain a large portion of the final tax (after nonrefundable credits) through withholding and estimated payments, from individuals who earn income.

Question 51

How is tax collected from individuals who earn income and are not subject to withholding?

Answer 51

They must pay estimated tax on that income in quarterly installments.

Question 52

When are quarterly tax installments due for a calendar-year taxpayer?

Answer 52

April 15th, June 15th, September 15 of the current year, and January 15th of the following year

Question 53

What are considered prepayments of tax?

Answer 53

• overpayments of tax in a prior year, which has not been refunded
• amounts withheld by an employer from wages
• direct payment by the individual (or another on his or her behalf)
• 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
• refundable tax credits

Question 54

How are withholdings, prepayments of tax, applied?

Answer 54

The aggregate amount is treated as if equal parts were paid on each due date, unless the individual establishes the actual payment dates

Question 55

How are prepayments of tax calculated?

Answer 55

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

• 100% of the prior year’s tax (if a return was filed), 110% for taxpayers whos prior year’s AGI exceeds $150k, $75,000 for married filing separately
• 90% of the current year’s tax
• 90% of the annualized current year’s tax (applies when income is uneven)

Question 56

What is considered tax?

Answer 56

The sum of regular tax, AMT, self-employment tax, and household employee tax

Question 57

When are penalties imposed?

Answer 57

Penalties are imposed if, by the quarterly payment date, the total of estimated tax payments and income tax withheld is less than 25% of the required minimum payment for the year. Penalties are determined each quarter and are not allowed as an interest deductino.

Question 58

When are penalties not imposed?

Answer 58

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

Question 59

When are tax liabilities due for payment?

Answer 59

They must be paid by the original due date of the return.

Question 60

Do automatic extensions for the filing of the return extend time for the payment?

Answer 60

No

Question 61

How is interest charged on unpaid tax liabilities?

Answer 61

It will be charged from the original due date.

Question 62

What happens if there is failure-to-file or pay on time?

Answer 62

A penalty results based on the unpaid tax liability (Tax liability-prepaid amount).

Question 63

What is the penalty for failure-to-file a return?

Answer 63

5% per month up to 25% of unpaid liability. Additionally, the minimum penalty for filing a return over 60 days late is the lesser of $450 or 100% of tax due.

Question 64

What is the penalty for failure-to-pay?

Answer 64

.5% per month up to 25% of unpaid liability is assessed for failure to pay tax.

Question 65

How are failure-to-pay penalties imposed?

Answer 65

They are imposed from the due date for taxes, other than the estimated taxes, on the return, they may offset a failure-to-file penalty.

Question 66

When may failure-to-pay penalties be avoided?

Answer 66

If an extension to file is timely requested, and at least 90% of the actual liability is paid 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.

Question 67

What are federal return filing requirements?

Answer 67

An individual must file a federal income return if gross income is above a threshold, net earnings from self-employment is $400 or more, or they are a dependent with more gross income than the standard deduction or with unearned income over $1,150.00

Question 68

Besides individuals, who also file income tax returns?

Answer 68

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

Question 69

What is the gross income threshold?

Answer 69

Until 2026, the gross income threshold amount generally is the standard deduction, excluding any additional amount for being blind.

Question 70

What is kiddie tax?

Answer 70

Net unearned income of a dependent child is taxed to the dependent at rates higher than the child’s marginal tax rates. This is designed to discourage parents from shifting unearned income to their child with lower tax rates. These higher rates are the parents’ marginal tax rates.

Question 71

What is net unearned income?

Answer 71

All taxable income other than earned income - Ex Interest, dividends, capital gains, trust distributions, gifts, debt cancellation, pension/annuities, social security royalties

Question 72

How is unearned income calculated for kiddie tax?

Answer 72

unearned income minus the sum of $1,150.00 and the greater of $1.150 of the standard deduction or the $1,150 of itemized deductions, or the amount of allowable deductions that are directly connected with the production of unearned income - A dependent is allowed at least $2,300 reduction in unearned income

Question 73

What is earned income?

Answer 73

Payment received for performance of personal services and is usually reported on form W-2 - Ex Salaries, wages, tips, scholarships

Question 74

What is the due date for individual federal tax returns?

Answer 74

returns must be postmarked no later than the 15th day of the 4th month following the close of the tax year. This is April 15th for calendar-year taxpayers

Question 75

What is the due date for an automatic 6-month extension?

Answer 75

An automatic 6-month extension is available by filing form 4868, which extends the filing deadline to October 15th for calendar-year taxpayers, the extension does not grant any additional time to pay taxes due.

Question 76

What is the due date for C corporation federal tax returns?

Answer 76

Eventually all C corporations will have original due dates on the 15th of the 4th month following the end of the tax year, and extended due dates 6 months later on the 15th day of the 10th month following the end of the tax year.

Question 77

What are the due dates for S corporations and partnerships?

Answer 77

For calendar-year taxpayers the original tax return is due March 15th, the automatic 6-month extension is available by filing form 7004 which extends the due date to September 15th.

Question 78

What happens if the 15th falls on a weekend or a legal holiday?

Answer 78

The due date is extended until the next business day

Question 79

What are disclosure of tax positions?

Answer 79

A tax position may only be adopted with substantial authority for the position.

Question 80

When does substantial authority exist for the disclosure of a tax position?

Answer 80

There is substantial authority for the tax treatment of an item only if the weight of authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment.

Question 81

Does statute define an exact probability percentage as substantial authority?

Answer 81

No, however the Statements on Standards for Tax Services issued by the AICPA suggest it is generally interpreted as requiring that a position has approximately 40% likelihood of being upheld on its merits if challenged.

Question 82

How can a taxpayers avoid accuracy-related penalties due to disregard of rules and regulations, or substantial understatement of income tax?

Answer 82

These penalties may be avoided if the return position is adequately disclosed and has a reasonable basis.

Question 83

For accuracy-related penalties due to disregard of rules and regulations, or substantial understatement of tax, what is the penalty?

Answer 83

Generally the penalty is equal to 20% of the underpayment. The penalty is not figured on any part of an underpayment on which the fraud penalty is charged.

Question 84

How is reasonable basis defined?

Answer 84

Reasonable basis is a relatively high standard of tax reporting that is significantly higher than not frivolous or not patently improper, generally greater than 20% probability. The reasonable basis standard is not satisfied by a return position that is merely arguable.

Question 85

What does disregard of the rules and regulations include?

Answer 85

Any careless, reckless, or intentional disregard.

Question 86

How is substantial understatement of income tax measured?

Answer 86

Substantial understatement of income tax occurs when the understatement is more than the larger of 10% of the correct tax or $5,000.

Question 87

How can the amount of the understatement of income tax be reduced?

Answer 87

It may be reduced to the extent the understatement is due to a tax treatment for which the taxayer has substantial authority.

Question 88

How is it determined whether there is substantial authority for the tax treatment of an item?

Answer 88

It depends on the facts and circumstances. Some of the items that may be considered are court opinions, treasury regulations, revenue rulings, revenue procedures, and notices and announcements issued by the IRS and published in the IRB that involve the same or similar circumstances as the taxpayer’s.

Question 89

How would a taxpayer adequately disclose the relevant facts about the tax treatment of an item?

Answer 89

They would use form 8275, Disclosure Statement, there must also be a reasonable basis for the taxpayer’s treatment of the item.

Question 90

What form is used to disclose items or positions contrary to regulations?

Answer 90

Form 8275-R Regulation Disclosure Statement

Question 91

How does adequate disclosure affect items attributable to tax shelters?

Answer 91

It has not effect, for tax shelters tax preparers are required to have both substantial authority and a reasonable belief for their position. This belief must be “more likely than not” (generally greater than 50% probability) the proper treatment.

Question 92

What is required for recordkeeping?

Answer 92

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.

Question 93

What is the requirement for employers regarding employment taxes?

Answer 93

Employers are required to keep records on employment taxes until at least 4 years after the due date of the return payment of the tax, whichever is later.

Question 94

What form is used to file a claim for a refund of federal income tax overpaid for the current tax year?

Answer 94

Filing a return form 1040

Question 95

What form is used to file a claim for a prior year refund?

Answer 95

A refund claim for a prior year is made by filing an amended return form 1040X

Question 96

What form is used to file a claim for a refund for years other than the current or prior year?

Answer 96

Form 843 is used to claim a refund of any other tax

Question 97

What are forms 1045 and 1139 used for?
.

Answer 97

They are applications for a tentative carryback adjustment to get a quick refund for a carryback of an unused business credit. 1045 is for individuals and 1139 is for corporations. Corporations may also use form 1139 for carrybacks of net capital losses.

Question 98

How long does a taxpayer have to make a claim for a refund?

Answer 98

A claim for refund must be made within the statute of limitations period. In general, most refund claims must be filed by the later of 3 years from the due date (April 15th, plus the filing extension time) or 2 years after the tax was paid.

Question 99

What date is used for refund claims in the event that the return was filed early?

Answer 99

Early returns are treated as if filed on the due date, April 15th

Question 100

What is the limitation period for refund claims related to worthless securities or bad debts?

Answer 100

If the fact of worthless was not discovered until after the original return was filed, the period of limitation is increased to 7 years.

Question 101

What is an assessment of deficiency?

Answer 101

A deficiency is any excess tax imposed over the sum of amounts shown on the return plus amounts previously assessed (reduced by rebates). Assessment of tax is made by recording the liability of the taxpayer in the office of the Secretary of the Treasury.

Question 102

What is the process for an assessment of deficiency?

Answer 102

1. computerized examination or audit - if this results in the IRS examiner proposing an addition to tax, a letter stating the proposal is sent to the tax payer - 30-day letter
2. if the taxpayer agrees with the adjustments the taxpayer accepts the changes and pays any deficiency. If consensus is not reached with the examiner in a conference with their supervisor, or from an administrative appeal, a notice of deficiency (ND) is mailed to the taxpayer, but not sooner than 30 days after a 30-day letter. The ND is referred to as a 90-day letter
3. A taxpayer may institute a proceeding in the U.S. Tax court within the 90 days following mailing of the ND (150 days if the taxpayer lives outside the U.S.) - The ND is a prerequisite to a U.S. Tax Court proceeding

Question 103

When are taxes assessed after a ND 90-day letter is sent?

Answer 103

If a petition is not filed with the U.S. Tax Court, taxes may be assessed 90 days after the ND is mailed. Filing a petition suspends the 90-day period.

Question 104

What situations are allowed for the immediate assessment of taxes (without a ND)?

Answer 104

• Tax shown on a return filed by a taxpayer
• Mathematical and clerical errors in a return
• Overstatement of credits
• Tax for which assessment is waived

Question 105

When is the Tax Court deprived of jurisdiction regarding tax assessments?

Answer 105

If there is partial or full payment of a deficiency prior to the mailing of the ND.

Question 106

What happens after a full payment of the deficiency balance?

Answer 106

The taxpayer may file a claim for refund, and if it is denied by the IRS they may institute a refund proceeding in a U.S. district court or the U.S. Court of Federal Claims

Question 107

How is the authority to assess tax limited?

Answer 107

It is limited by statute to specific periods, the general statute of limitations for assessment of a deficiency is 3 years from the date the return was filed, the IRS generally has 10 years following the assessment to begin collection of tax by levy or a court proceeding.

Question 108

What is the statute of limitations on tax liability assessments if there is omission of items of more than 25% of gross income stated in the return?

Answer 108

6 years, only items completely omitted are counted. Specifically for goods or service s from a trade or business, gross income includes gross receipts before deduction for cost of goods sold.

Question 109

What is the statute of limitations on tax liability assessments if there is a failure to file?

Answer 109

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

Question 110

What is the statute of limitations on tax liability assessments if there is fraud?

Answer 110

Attempting to evade tax results in an unlimited assessment period. Fraud cannot be cured by filing a correct amended return.

Question 111

When is the statute of limitations on tax liability assessments extended?

Answer 111

If the taxpayer and the IRS entered into an extension agreement before the S/L expires.

Question 112

In certain circumstances, the statute of limitations may unjustly penalize the taxpayer or the government for a given return period, this may require mitigation of the statute of limitations. What are the provisions for mitigation of the statute of limitations?

Answer 112

Mitigation provisions are limited to income tax, not gift , etc., when the following circumstances are met:

• there is a “determination” for a tax year concerning the treatment of an item of income (tax court decision)
• on the date of determination, correction of the error must be barred (statute of limitations)
• there must be a condition necessary for adjustment, ex- double income (deduction)
• in the proceeding of determination, the successful party must have taken a position inconsistent with the position in the closed year

Question 113

What happens if the taxpayer is unable to pay the full liability?

Answer 113

The taxpayer may apply for an offer-in-compromise, the IRS considers the taxpayer’s

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

Question 114

What happens if a case is closed after examination?

Answer 114

it will not be reopened to make adjustments unfavorable to the taxpayer except under certain circumstances

Question 115

What situations may cause a case to be reopened after examination?

Answer 115

fraud, malfeasance, collusion, concealment, or misrepresentation of material fact.

Question 116

What is the timing technique of tax planning?

Answer 116

Accelerate or defer recognition of income and/or deductions to get the lowest tax liability for the current year.

Question 117

What items should be considered when evaluating the use of timing techniques?

Answer 117

• time value of money - ex. 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?
• future (or likelihood of proposed) tax law
• individual circumstances of the taxpayer
• doctrine of constructive receipt

Question 118

What is the technique of shifting income?

Answer 118

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 owners. It also involves shifting income from one tax jurisdiction to another with different marginal tax rates.

Question 119

What are three key terms when discussing shifting income?

Answer 119

1. assignment of income doctrine
2. related party transaction
3. arm’s-length transaction

Question 120

What is assignment of income doctrine?

Answer 120

A taxpayer cannot avoid tax for income the taxpayer earned by assigning it to another person

Question 121

What are related party transactions?

Answer 121

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

Question 122

What are arm’s-length transactions?

Answer 122

These occur when the involved parties act independently, regardless of any relation. Transactions between unrelated parties are generally considered to be arm’s-length.

Question 123

If parties in a transaction are related, when is the transaction considered arm’s-length?

Answer 123

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.

Question 124

What is the purpose of the rules related to shifting income (assignment of income doctrine, related party transactions, arm’s-length transactions)?

Answer 124

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.

Question 125

What are other rules that may limit or otherwise make income shifting difficult?

Answer 125

Kiddie tax and gift/wealth transfer rules

Question 126

When shifting income among family members or entities, what must be determined?

Answer 126

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

Question 127

What is conversion of income?

Answer 127

Converting income from a less favorable category to a more favorable one. Some conversions involve a comparative analysis of minimization of current taxes to minimization of future taxes.

Question 128

What are examples of nontaxable property?

Answer 128

• employee benefits - ex. employer-paid medical reimbursement
• investing in municipal bonds (nontaxable investment interest)
• convert nondeductible personal expense to a business expense

Question 129

What is tax avoidance?

Answer 129

Minimizing tax liability through legal arrangements and transactions. Avoidance maneuvers take place prior to incurring a tax liability.

Question 130

What is tax evasion?

Answer 130

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

Question 131

What is a key distinction between avoidance and evasion?

Answer 131

Taxpayer intent

Question 132

What are the “badges” of fraud?

Answer 132

• understatement of income
• improper allocation of income
• claiming of fictitious deductions
• questionable conduct of the taxpayer
• accounting irregularities

Question 133

When is taxpayer intent called into question?

Answer 133

When one of the “badges” of fraud is identified

Question 134

What does Sec. 7201 state concerning fraud?

Answer 134

“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, up on conviction thereof, shall be fined not more than $250,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of the prosecution”

Question 135

How is tax filing status determined if it changes throughout the year?

Answer 135

The tax filing status on the last day of the year determines the filing status for the entire year.

Question 136

Who must file as single?

Answer 136

An individual who is not married nor qualifies for surviving spouse or head of household status.

Question 137

What is married filing a joint return status?

Answer 137

Married individuals who file a joint return account for their items of income, deduction, and credit in the aggregate.

Question 138

If spouses use different accounting methods is a joint return allowed?

Answer 138

Yes

Question 139

May spouses with different tax year file a joint return?

Answer 139

NO

Question 140

If a spouse dies and the surviving spouse does not remarry before the end of the tax year, may a joint return be filed?

Answer 140

Yes

Question 141

What situations allow for two individuals to be treated as legally married for the entire year?

Answer 141

If on the last day of the year, they are:

• legally married and cohabitating as spouses
• legally married and living apart but not separated pursuant to a valid divorce decree or separate maintenance agreement
• separated under a valid divorce decree that is not yet final

Question 142

What is married filing separately status?

Answer 142

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.

Question 143

What is head of household status?

Answer 143

An individual qualifies for head of household status if they satisfy conditions with respect to filing status, marital status, and household maintenance.

Question 144

What are the conditions to qualify for head of household status?

Answer 144

• the individual may not file as a qualifying surviving spouse
• A married individual who lives with a dependent apart from the spouse qualifies for head of household status if: 1. they file separately 2. they pay more than 50% toward maintaining the household 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, the individual can claim the child as a dependent.
• 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.

Question 145

What are the qualifying costs for household maintenance?

Answer 145

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

Question 146

What are nonqualifying costs for household maintenance?

Answer 146

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

Question 147

Do nonresident aliens qualify for the head of household status?

Answer 147

No

Question 148

What is the qualifying person and time requirement for the head of household status?

Answer 148

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 either a qualifying child or a qualifying relative

Question 149

What are the two special rules concerning a qualifying person?

Answer 149

1. a 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.

Question 150

What are the conditions for the qualifying surviving spouse status?

Answer 150

The qualifying surviving spouse status is available for 2 years following the year of the death of the spouse if:

1. the taxpayer did not remarry during the tax year
2. the surviving spouse qualified w/the deceased spouse for married filing joint return status for the tax year of the death of the spouse.
3. the surviving spouse maintains a household for the entire taxable year, furnishing more than 50% of the costs to maintain the household for the tax year, the household must be the principal place of abode for the qualifying dependent of the surviving spouse, the dependent must be a son, daughter, stepson or daughter or adopted child (does not include a foster child)