ACC 237 Exam 1 Flashcards
Tax
payment required by gov. unrelated to a specific benefit/service received
- imposed by gov., required, and no direct benefit
Marginal Tax Rate
tax rate on additional increment of TI
- helpful for individuals
change in tax/change in TI
Average Tax Rate
average tax on each $ of TI -> better for corp.
Tax/TI
Effective Tax Rate (ETR)
average rate of tax on total income
- helpful for indiv.
Tax/Total Income
Proportional Tax Rate
flat, constant rate
ex. sales tax
- effects lower income heavier than high
Progressive Tax Rate
increase marginal tax as base increases
ex. current US tax system
Regressive Tax Rate
decreasing marginal tax as base increases
ex. Social Security Tax - has a cap
Federal Tax
- Income tax is largest source - 60% of rev.
- Employment + Unemployment ex. SS
- Excise tax - tax on quantity of items sold
- Estate + Gift tax - FMV on wealth transfers
SALT
Sales + Use : sale is purchase, use is on goods purchased outside state
Property: ad valorem tax - on FMW, tangible + intangible
Income:
Ad Valorem tax: tax based on value of property
Excise: same items as fed (alc, fuel, gas, tabacco)
Implicit Tax
indirect taxes from tax advantage a gov. grants
- reduced before-tax rate, higher after-tax profit
ex. Municipal Bonds - lower interest rates but no taxes
How to Evaluate Tax System
Sufficiency: amt of tax rev. needed to be generated and make sure it reaches the goal
- Static: forecast ignores changes in TP activity
- Dynamic: forecast tries to predict + consider changes in activities (income + substitution effect)
- Income Effect: as tax rate inc, work harder to maintain same after tax $$
- Substitution Effect: tax rate inc, substitute non-tax for income, so work less and do more leisure activities
Equity: tax system based on ability to pay
- Horizontal Equity: two TP in similar position pay same tax
- Vertical Equity: TP w greater ability to pay will pay more $$
Certainty: TP should determine when, where, and how to pay tax
Convenience: system easy enough to work, easy pay tax
Economy: minimize compliance and admin costs of system
Budget Reconciliation
How bills become laws, address taxes and how to spend
- not law, not signed by pres. only need 50+ votes
- get around Senate/House vote and Burg rule
Filing Requirements
U.S. income tax based on voluntary compliance
Corporations: all must file no matter income
Estate and Trusts: req. to file if GI > $600
Individuals: status determined by filing status, age, and GI
- tp should file return if need refund or gov. credit
- look at schedule for rates + deductions
Due Date
Individuals due 15th day of 4th month (not weekend/holiday)
- allowed an auto extension to FILE taxes, not pay
- payment due
Penalty for no return filed - not deductible
- 5% of tax per month, max 25% + interest
if tp no owe tax, no penalty
Statue of Limitations
period which TP can file amended return/IRS can do an audit
- 3 yrs after longer of date due date/ file date w extension
- can be extended to 6 years if omitted items after 25%+ of income
For fraud/failure to file: no limited
IRS Audit Selection
IRS has data suggesting tax return has a high chance of sig. understatement of liability
Discriminant Function System (DIF): assign score for prob. of under reporting, use historical data
Document Perfection System: checks for math errors
Information Matching Program: compares returns with other info (W2, 1099-INT, 1099-Div)
also has audit for certain industries and large companies
Audit Types
Correspondence Examinations: by mail, one/two items on return, may need extra documents
- most common, narrow, least complex, usually individ.
Office Examination: at local office/acc. firm
- somewhat common, broader
- small biz, sole proprietorships, middle-high income
Field Examinations: at place of biz/locations, least common, very broad/complex
- can be months/years, large biz + complex individ
After Auditing
If agree with IRS adjustments, sign + pay taxes/refund
If dispute, receive 30 day letter, can either
- 1) request appeals officer, separate IRS division or
- 2) accept
If reach agreement - pay taxes/refund
If disagree/no response - 90 day letter
- 1) Agree
- 2) Don’t pay tax - petition US Tax Court
- 3) Pay tax - file refund claim by suing IRS with US District Court/US Court of Federal Claims
Tax Court v District Court
Tax court has tax expert judges, only tax cases, national
- do not pay taxes before case
- very fact based, tax law facts
District Court are generalist judges - local
- pay taxes before, but can tell a story, maybe jury
US Court of Federal Claims - national
Also appeal to US Circuit courts of appeals - 13 courts
- Federal Claims go to federal circuit
or US Supreme Court, but extremely rare for tax cases unless very big significance - no appeals, no jury
Primary Authorities
Official sources of tax law
- Statutory Sources (IRS Code)
- Constitution, tax treaties, IRC (Internal Revenue Code of 1986) - main one
- Judicial Sources
- Executive/Admin (Treasury/IRS pronouncements)
law is from Congress, IRS only enforces
Secondary Authorities
unofficial tax authorities that interpret + explain primary
- Tax services/articles/textbooks
- useless in tax disputes, cannot cite
U.S. Treasury
Administrative Sources - primary
Regulations : treasury official interpretation of IRC, highest weight auth. weight
Forms -
- final - final unless revoked
- temporary (3 yrs life, same weight as final)
- proposed (least auth. + allow public comment)
Purpose:
- Interpretative - T’s interpet.
- Procedural - T’s procedures related to admin.ing code
- Legislative - rare, Congress direct to create reg. in specific area - most weight
Revenue Rulings: address application of Code in spec. situt, less auth. very detailed
Revenue Procedures: explain great detail IRS practice + admin procedures
Letter Rulings: less auth, v specific to TP
Legislative Process to Enact Tax Law
- House Ways and Means Committee propose bill
- House of Representatives debate + vote
- House approve, go Senate Finance Committee to revise + vote
- Finance Com approve, go to Senate to vote + revise
- Senate approve, go to Joint Conference Committee, they debate/adopt House/Senate/merge/whatever version, no agree = leg die
- Approve act, go to president to sign
- If pres sign, add to Code of 1986
- No sign, Congress can override veto with 2/3 vote in House + Senate
Tax Professional Responsibilities
American Institute of CPA’s
AICPA Code of Professional Conduct
AICPA Statement on Standards for Tax Services
IRS Circular 230 - gov. tax practices and all pple practive befoe IRS
State board of accountancy statutes
- fail to comply can be admonished, suspended, barred from practicing
TP and Tax Profess Penalities
Civil Penalties: common, monetary, imposed for violations without reasonable cause (intentional)
- tax practitioners have privileged tax advice, no communications
Criminal Penalties: uncommon, willful intent to defraud (tax evasion), higher standard to convict + penalty
- filing a tax return is taking a position
But no penalty if:
- substantial auth. support tax pos. OR
- reasonable basis for pos.and disclosed on tax return
Reasonable Basis = 20% success
Substantial Auth = 40% success
Tax Formula
Look at book im not writing this
All-Inclusive Income
gross income is all income no matter the source
-US tax law use this concept
Realized Income
- has measurable change in property
- all realized income is recognized in gross income unless specifically excluded or deferred
Recognized Income
reported on tax return as Gross Income
