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CPA - REG > Chapter 2 - Individual Tax - Adjustments, Deductions, and Credits > Flashcards

Chapter 2 - Individual Tax - Adjustments, Deductions, and Credits Flashcards

0
Q

Educator Expenses deduction:

A

Eligible educators can deduct up to $250 of qualified expenses paid ($500 for MFJ), educator must be K - grade 12 teacher/instructor/counselor/principal/aide in school for 900+ hours for the school year.

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1
Q

Items making up Adjustments (Above the line deduction/ Deduction to arrive at AGI):

A
  1. Educator Expenses
  2. IRA
  3. Student Loan Interest Expenses
  4. Tuition & Fees Deduction
  5. Health Savings Account
  6. Moving Expenses
  7. One-Half Self-Employment FICA (Not deducted on Sch. C)
  8. Self-Employed Health Insurance (Not deducted on Sch. C)
  9. Self-Employed Retirement (Not deducted on Sch. C)
  10. Interest Withdrawal Penalty
  11. Alimony Paid
  12. Attorney Fees Paid in Certain Discrimination and Whistle-Blower Cases
  13. Domestic Production Activities Deduction
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2
Q

Types of IRAs

A
  1. Deductible IRA
  2. Nondeductible IRA
  3. Roth IRA
  4. Coverdell education savings accounts (IRA)
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3
Q

Deductible IRAs and requirements

A
  1. Earnings Tax Deferred: Earnings accumulate tax-free (deferred) -> Taxed when money is pulled out
  2. Withdrawals Taxable: taxable as ordinary income (and maybe penalties) when money is taken out

Deductibility Requirements: taxpayer can’t deduct contribution to IRA if both conditions are met: Rich and In retirement plan

a. Excess AGI (rich people): $60k - $70k (Single/HoH) or $96k-$116k(MFJ)
b. Active Participation in Another Qualified Plan (401(k))

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4
Q

What is the exception to the IRA deductibility requirement?

A

Both conditions must be met (no IRA deduction if Rich AND in retirement plan):

a. Taxpayer can’t take IRA deduction if spouse is in the plan and taxpayer isn’t
b. Phase-out (super rich): Taxpayers with modified AGI between $181k - $191k -> will be denied pension (for both husband and wife) even if spouse has it.

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5
Q

What is the amount of deduction for IRA?

A

The lesser of:

  1. $5,500 ($11,000 for MFJ) OR
  2. The individual’s compensation

Compensation includes:

a. Salary
b. Wages
c. Commissions
d. Bonuses
e. Alimony

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6
Q

Additional Catch-up Contributions (age 50+)

A

Taxpayers over 50 years of age are allowed additional contribution (“adjustments’) of $1,000.

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7
Q

Retirement Plan Contribution Credit

A

Eligible taxpayers are entitled to a tax credit of max. $1,000 for contributions in either traditional or Roth IRA

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8
Q

Roth IRA

A
  1. Nondeductibile contributions
  2. Tax-Free Accumulation of Earnings
  3. Tax-Free Distributions (withdrawals): Principal withdrawal is tax-free, earnings (accumulated) are tax-free
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9
Q

Contribution limits to Roth IRA

A

Not allowed to combine both traditional and Roth IRA

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10
Q

Roth IRA Phase-out Income Limits (modified AGI)

A
  1. Single taxpayers: $114k - $129k
  2. MFJ taxpayers: $181k - $191k
  3. MFS taxpayers: $0 - $10k
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11
Q

Rollovers from regular to Roth IRAs

A

No penalty when transferring money from regular IRA to Roth IRA but is still subject to regular tax

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12
Q

Nondeductible IRA (final option for those no eligible for deductible IRA or Roth IRA)

A

For individuals who are not eligible to make deductible contributions to regular and Roth IRAs.It is nondeductible when putting in the principal so nontaxable when withdrawing.

  1. Limitation is the lesser of:
    a. $5,500
    b. Individual’s compensation
    c. Limit not contributed to other (regular and Roth) IRAs

Note: no phase-out for this IRA

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13
Q

Coverdell Education Savings Accounts (education IRA)

A
  1. Nondeductible Contributions: max contribution per beneficiary (grandchildren under age 18 usually) is $2,000 annually
  2. Tax-Free Accumulation of Earnings
  3. Tax-Free Distributions (withdrawals): For specific purpose
    a. Qualified Education Expenses (through high school)
    b. Time Limitation (beneficiary reaches 30 years of age)
    c. American Opportunity or Lifetime Learning Credits
  4. Contribution Requirements: Beneficiary/Child under age 18

Note: Phase-out exist, also, this IRA can’t be combined with other IRAs.

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14
Q

Student Loan Interest Expense

A

Adjustment limit is $2,500 (any excess or disallowed is “personal interest” and NOT deductible) and dependent can’t claim the adjustment.

Note: There is a phase-out

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15
Q

Tuition and Fees Deduction

A

Maximum: $4,000

Maximum Income Limit: $65,000

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16
Q

Health Savings Accounts (HSA)

A

It enables workers with high-deductible health insurance to make pretax contributions of up to $3,000 ($6,550 for families) to cover health care cost.

The cost increase by $1,000 for those who reach age 55. No contributions allowed once tax payer becomes covered by Medicare Parts A or B.

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17
Q

High-Deductible Plan

A

Defined as: plan that has at least a $1,250 annual deductible (self-only coverage) and $2,500 deductible (family coverage)

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18
Q

Moving Expenses

A

For work related only (employee expenses) -> all others are miscellaneous itemized deduction

  1. New workplace and old resident is at least 50 miles greater than old resident was to old workplace (out of state)
  2. 39 weeks stay: 75% of next year in new job
  3. Only direct moving costs are allowable
    a. Travel and lodging for taxpayer and family
    b. Transporting household goods and personal effects to new location

Nondeductible moving expenses:
Meals, pre-move house hunting, expense of breaking a lease, temporary living expenses

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19
Q

Tax on Self-Employment (Social Security 50%)

A

Not deducted on Sch.C.

You pay both halves (boss and employee)

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20
Q

Self-Employed Health Insurance (100% deductible)

A

Not deducted on Sch. C.

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21
Q

Keogh (Profit Sharing) Plans: Max. annual deduction and addition:

A

Not deducted on Sch. C

Max. annual deductible amount:
Lesser of:
1. $52,000
OR
2. 25% net (Keogh/self-employed) earnings
Max. Annual Addition (contribution)
Lesser of:
1. $52,000
OR
2. 100% net earnings (only if compensation is less than $52,000)
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22
Q

Net Earnings Keogh formula:

A 
Business Income
Less: Business Expenses
------------------------------
Net Business Income
Less: 1/2 Self-Employment Tax
Less: Keogh Deduction
------------------------------
Keogh Net Earnings (x  25%) AKA 20% of self-employment income before Keogh deduction
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23
Q

Penalty on Early Withdrawal of Savings (Interest Income) - Interest Fortfeited

A

Can’t be net against interest income

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24
Q

Alimony payments

A

Income to payee, adjustment to payor

  1. Pmt must be legally required under a written divorce
  2. Pmt must be in cash or its equivalent (pay credit card bills or pay college fees)
  3. Pmt can’t extend beyond death of the payee
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25
Q

Child Support

A

Nontaxable to payee, nondeductible to payor

Note: payment must first be applied to child support before alimony

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26
Q

Property Settlements

A

Nontaxable to payee, nondeductible to payor

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27
Q

Items included in itemized deduction:

A
  1. Medical expense (10% of AGI)
  2. Taxes - State/Local (income/sales & property)
  3. Interest Expense (HIPPE)
  4. Charity (50% of AGI for cash, 30% of AGI for FMV of property)
  5. Casualty/Theft (10% of AGI)
  6. Miscellaneous (2% of AGI)
  7. Other Miscellaneous
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28
Q

Limitation on Itemized Deduction:

A

Phase-out starts when AGI exceeds 4305050 (MFJ and widower), $279,650 (HoH), $254,200 (single), and $152,525 (MFS)

Note: Items not reduced by the phase-out - GIMC
Gambling losses
Investment Interest Expense
Medical Expense
Casualty & Theft (non. business)
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29
Q

Medical Expenses Qualifers

A
  1. Filing taxpayer
  2. Spouse
  3. Dependent who receive over half of his/her support from the filing taxpayer (under $ taxable income will not apply)
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30
Q

Timing of deduction for medical expense

A

Paid (cash or check) amounts during the year

Charged amounts during the year (regardless of when paid)

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31
Q

Deductible Medical Expense formula;

A 
Qualified Medical Expenses
Less: Insurance Reimbursement
--------------------------------
Qualified Medical Expense "Paid"
Less: 10% AGI
--------------------------------
Deductible Medical Expenses
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32
Q

Types of Deductible Medical Expenses (10% of AGI)

A
  1. Medicine and drugs (prescribed)
  2. Doctors
  3. Medical and accident insurance
  4. Required surgery
  5. Transportation to medical facility
  6. Physically handicapped costs (cost for structural changes in residences to accommodate to handicap conditions)

Note: Insurance reimbursement is included in medical expense

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33
Q

Types of nondeductible medical expenses:

A 
Elective surgery
Cosmetic operations
Illegal drugs, travel, vitamins
Life insurance (financial insurance)
Capital expenditure (FMV)
Health club memberships
Personal hygiene and other ordinary personal expenses
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34
Q

State, Local and Foreign Taxes (not federal income taxes) for deductible taxes

A
  1. Real Estate Taxes (state, local and foreign)
  2. Income Taxes (state, local and foreign)
  3. Personal Property Taxes (state and local)
  4. Sales Tax

Note: Cash basis: deduct taxes in year paid
Accrual method: deduct tax in year accrued

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35
Q

Real Estate Taxes (state, local and foreign)

A
  1. Taxpayer must be legally obligated to pay
  2. Prorated taxes
  3. Taxes paid under protest are deductible (subsequent recovery = include in gross income)

Note: Real estate tax does not include street, sewer and sidewalk assessments (they are not special assessments)

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36
Q

Income Taxes (state, local and foreign) deductible for:

A
  1. Estimated taxes paid during the year
  2. Withheld taxes from paychecks during the year
  3. Assessments paid during the year for prior year’s tax

Note: Cash basis taxpayer, deduct in the year paid, NOT in year it applies to.

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37
Q

Sales Tax

A

Taxpayer can only elect to deduct:
a. State and local income taxes
OR
b. State and local general sales tax

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38
Q

Nondeductible taxes include:

A

FIB
Federal taxes (including social security)
Inheritance taxes for states (aka federal estate pick-up tax)
Business and rental property taxes

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39
Q

Interest Expense of itemized deduction:

A

HIPPE:

Home Mortgage Interest
Investment Interest Expense
Personal (consumer) interest is NOT deductible
Prepaid Interest (allocate to proper period) - deduct when incurred & paid
Educational Loan Interest (an adjustment NOT itemized deduction) - max. $2,500, excess is not allowed

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40
Q

Home Mortgage Interest under interest expense:

A

Deductions are allowed for: qualified residence interest (1st or 2nd home buyers) aggregating $1 mil

Qualified residence interest:
a. Acquisition Indebtedness - max. $1mil (or 500k for MFS) for cost incurred in buying, constructing or improving the principal and 2nd home. Excess amount will be treated as personal interest (not deductible)

b. Home Equity Indebtedness - Lesser of :$100k max (or 50k for MFS) OR FMV of property. Anything that is outside of acquisition indebtedness. Excess amount will be treated as personal interest (not deductible)

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41
Q

Investment Interest Expense of itemized deduction:

A

Deduction amount is limited to net (taxable) investment income (treated like gambling losses). Any excess expense over the “allowed” investment interest can be carried forward indefinitely.

Examples include:

a. Investment advice fees
b. Safe deposit box rentals

Note: Muni bond is tax free so it will not be used to net against any investment expense (investment expense is nondeductible in this case)

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42
Q

Examples of investment income to net against any investment interest expenses:

A
  1. Interest and dividends (portfolio income)
  2. Dividends (portfolio or investment income)
  3. Rents
  4. Royalties (in excess of expenses)
  5. Net long-term and short-term capital gains
43
Q

Items excluded from investment (taxable) income for interest expense:

A

Municipal bonds or any tax-free bonds are no deductible

44
Q

Charitable Contributions include:

A

a. Charity: items given to organization (tax deductible)
b. Cash (50% of AGI for cash or check actually paid or credit card when charged) or lesser of: (basis or FMV of property) (30% of AGI)

For long term property - deduct at FMV a at date of gift
For short term property - deduct at lower of FMV or cost

Note: Services rendered, gifts and political contributions are nondeductible and those who do not itemize deductions may not deduct charitable contributions

If contributed property FMV is less than paid contributed amount, the difference is deductible.

45
Q

Carryover of excess charitable contributions:

A

Up to 5 years

46
Q

Casualty and Theft Losses (10% of AGI) formula:

A 
Smaller loss of: Loss Cost/Adjusted Basis or Decreased FMV
Less: Insurance Recovery
-------------------------------
Taxpayer's Loss
Less: $100 per casualty
-------------------------------
Eligible Loss
Less: 10% AGI
-------------------------------
Deductible Loss (or generally the smallest answer for MCQ)
47
Q

Casualty and theft losses includes:

A

A sudden or unexpected event.

Any event had causes damaged over a long period of time, lost/misplaced/broken property are not eligible for the deduction

48
Q

Miscellaneous Itemized Deduction (2% of AGI) includes:

A
  1. Tax preparation fees
  2. Unreimbursed union dues
  3. Unreimbursed business expenses (employee, no family members)
    a. travel, meals and lodging (overnight business travel)
    b. transportation expenses (100% deductible)
    c. Meals/entertainment expenses (50% deductible) - no deduction for club dues
  4. Educational Expenses (business related - diff. from educational interest expense)
  5. Uniforms
  6. Business Gifts ($25 per recipient per year)
  7. Employment Agency fees (hunting for new job in same profession ONLY)
  8. Expenses of Investors - Safe deposit Box and Investment Advice
  9. Subscriptions to Professional Journals
    10 Debit Card Convenience Fees incurred to pay income tax

Note: employee moving expense is considered an adjustment. Activities not engaged in for profit (hobbies) are not deductible (if 3 out of taxable years shows a profit)

Under unaccountable plan, money reimbursed by employer should be reported as gross income for the employee

49
Q

Transportation Expense (100% deductible) includes:

A
  1. Home to out of town business
  2. Regular office to out of town business
  3. Regular office to temporary work site (not normal work site)
  4. Regular office to 2nd job
50
Q

Other Miscellaneous Deductions (aka fully deductible and not subject to 2% AGI test):

A
  1. Gambling Losses (deduct to the extent of gambling winnings
  2. Federal Estate Tax paid on income in respect of a decedent
51
Q

What are the two types of tax credits?

A
  1. Personal Tax Credits (nonrefundable, only reduces tax)

2. Refundable Credits (reduces tax and are refundable)

52
Q

Examples of Personal Tax Credits (nonrefundable, can only reduce personal tax lability to 0):

A
  1. Child and dependent care credit
  2. Elderly and permanently disabled credit
  3. Education credits (Lifetime learning credit)
  4. Retirement savings contribution credit
  5. Foreign tax credit
  6. General business credit
  7. Adoption credit
53
Q

Examples of Refundable Credits (reduces tax liability and creates a refund):

A
  1. Child and tax credit (refund is limited)
  2. Earned Income Credit (EIC): for low income
  3. Withholding taxes (W-2)
  4. Excess Social Security paid
  5. American opportunity credit (40% refundable)
54
Q

Child and Dependent Care Credit (personal tax credit) eligibility and max credits:

A

1 dependent = $3,000
2+ dependents = $6,000

Both parents must be working and is paying someone to care for junior.

Eligible people: kids under 13 and/or disabled dependent or spouse

55
Q

Child and Dependent Care Credit eligible expenses:

A
  1. Babysitter
  2. Nursery school
  3. Day care

NOT grammar school

56
Q

Child and Dependent Care Credit Phase-out:

A

Min. 20% for AGI over $43,000 (combined parents) is $600 (20% of $3,000) or $1,200 for 2+ dependents.

20% of lowest earned income spouse only

57
Q

Credits for the Elderly and/or Permanently Disabled (personal tax credit) eligibility requirement :

A

Has to be old OR disabled (15% of eligible income).

Single: $5,000 credit limit, 1/2 of AGI over $7,500
MFJ: $7,500 credit limit, 1/2 of AGI over $10,000

58
Q

Elderly and Permanently Disabled Credit calculation:

A 
Credit Limit (single/joint) [$5,000/$7,5000]
Less: Social Security
Less: 1/2 Excess AGI [1/2 over $7,500/$10,000]
--------------------------
Balance
x 15% (Rate)
--------------------------
Credit
59
Q

Education Credit types:

A
  1. American Opportunity Credit (AOC): Refundable
  2. Lifetime Learning Credit (nonrefundable)
  3. Coverdell Education Savings Account Distribution
60
Q

American Opportunity Credit (AOC) eligibility and credit limit:

A

Refundable: can be used against federal income taxes for qualified tuition, fees and course materials (books) for student’s 1st four years of college

Max. credit is $2,500 (100% of first $2,000 of qualified expenses and 25% of next $2,000 of expenses paid)

Qualified expenses are per student, can’t be given if student is convicted of federal or state drug offense

Phase-out when AGI exceeds $80,000 - $90,000 or $160,000 - $180,000 (joint)

61
Q

Lifetime Learning Credit eligibility and credit limit (personal tax credit):

A

Nonrefundable

Credit limit: max is $2,000 per year (20% of qualified expenses up to $10,000)
Credit is made available for unlimited number of years for qualified tuition and related expenses (except books)

Phase-out: AGI exceeds $54,000 - $64,000 or $108,000 - $128,000 (joint)

62
Q

What are the limits to education credits a taxpayer can take?

A

Not limit. Taxpayer can claim different credits in one year for each of their dependents (one child can claim AOC and other for Lifetime)

63
Q

Qualified Tuition Programs:

A

Tax rule: Exempt from all federal income taxation

It is a program where a person can purchase tuition credits or make cash contributions to an account on behalf of a beneficiary for payment of qualified higher education expense.

64
Q

Adoption Credit (personal tax credit):

A

Credit limit:

  1. Per child - $13,190
  2. Special needs child: $13,190

Eligible Expense:
1. Reasonable and necessary expenses, costs and fees

Note: Credit is not available for adopting child from spouse (step child) OR medical expenses (part of itemized deduction)

Phase-out: AGI exceeds $197,880 - $237,880

65
Q

Retirement Savings Contribution Credit (personal tax credit) eligibility:

A

AKA IRA “credits” with a phase-out

  1. Must be at least 18
  2. Not a full-time student
  3. Not a dependent
66
Q

Foreign Tax Credi:

A

Allowable credit - lesser of:
1. Foreign taxes paid
OR
2. (Taxable income from all foreign operations / Taxable income + exemptions) x U.S. tax = Foreign tax credit limit

Any excess (disallowed) foreign tax credit paid can be carry back 1 year and forward 10 years.

67
Q

General Business Credit includes:

A
  1. Investment credit
  2. Work opportunity credit
  3. Alcohol fuels credit
  4. Increased research credit
  5. Low-income housing credit
  6. Qualified childcare expenditures
  7. Welfare-to-work credit
  8. Employer-provided childcare credit
  9. Small employer pension plan start-up cost credit
  10. Alternative motor vehicle credit
  11. Other infrequent credits
68
Q

General Business Credit formula:

A 
Allowable credit amount:
Tax amount
Less: $25,000 [first $25,000 is always 100%]
Less: Excess x 75%
------------------------
Max. credit permitted

Any unused credits can be carried back 1 year and forward 20 years.

69
Q

Working Opportunity Credit (part of general business credit - personal tax credit) credit limit and eligibility:

A

40% of first $6,000 of 1st year’s wage

Qualified groups:
Handicapped
18-24 from poor families
Vietnam veterans from economically disadvantaged areas
Certain food stamp recipients
70
Q

Child Tax Credit (refundable):

A

Credit claimed: $1,000 per “qualifying child”

Qualifying child: CARES rule except child must be UNDER 17, must be US citizen or resident

Phase-out: reduce by $50 for each $1,000 it exceeds over the AGI limit ($110,000 joint)

71
Q

Earning Income Credit (refundable) eligibility and credit limit:

A
  1. Mainly for certain earned low-income taxpayers
  2. Be over the age of 25 but less than 65

Doesn’t need a qualifying child to be eligible, but a qualifying child can increase % of EIC BUT can’t claim credit if have “disqualified income” (taxable or nontaxable interest, dividend, net rental and royalty income, net capital gains income and net passive income other than self-employment income) exceeding $3,350.

72
Q

Withholding Tax:

A

Paycheck credit, is refundable

73
Q

Excess FICA

A

Extra social security tax withheld- refundable

Applies to 2 or more employers ONLY. No credits allowed for 1 employer

74
Q

Small Employer Pension Plan Start-up Cost Credit

A

Encourages employers to have employees get pension plan - eligible for small businesses with 100 or fewer employees who earned at least $5,000 previous year.

Credit: 50% of first $1,000 (up to $500/year)

75
Q

Small Business Health Care Tax Credit

A

Allows some employers a tax credit for providing health care coverage to employees.

A credit of up to 35% of the employer’s costs of the plan premiums, can offset AMT

Does not apply any person with 2%+ ownership or 5%+ shareholder ownership

76
Q

Small Business Health Care Tax Credit limitation:

A

No double benefit: if expenses were used to qualify for this credit, it can be used as tax deduction for employee benefits expense

77
Q

Health Coverage Tax Credit:

A

80% of health care premiums for qualified health insurance paid is allowed as credit

78
Q

Residential Energy Credits

A

Max 15% of qualifying nonbusiness energy property or improvements are allowed (up to $500 max).

79
Q

Alternative Minimum Tax (AMT) formula:

A

AMT is defined as the excess of tentative AMT over the regular tax (pay greater of regular tax or tentative min. tax)

Regular Taxable Income
\+/- Adjustments (PANIC TIMME)
\+ Preferences (PPP)
-----------------------------
Alternative Min. Taxable Income (AMTI)
Less: Exemptions
-----------------------------
Alternative Min. Tax Base
x Tax Computations
-----------------------------
Tentative AMT Tax
Less: Tax Credits
-----------------------------
Tentative Min. Tax
Less: Regular Income Tax
-----------------------------
Alternative Min. Tax (Pay in addition to regular tax)
80
Q

4 Major focus concerning AMTs:

A
  1. The exemption formula
  2. Distinguishing “adjustments” from “preferences”
  3. The AMT credit carryforward period (against regular tax)
  4. Credits - available to reduce AMT (not regular tax)
81
Q

1 of 4: Exemption formula:

A

Single - $52,800 less 25% for AMTI over $117,300
MFJ - $82,100 less 25% for AMTI over $156,500
MFS - $41,050 less 25% for AMTI over $78,250

Formula:
Exemption credit (based on status) xxx
AMTI xxx
Less: Threshold xxx
—————————
Excess
x 25%
—————————
Less: Reduction (xxx)
————————–
AMT Exemption

82
Q

2 of 4: Items making up adjustments:

A

PANIC TIMME

  1. Passive activity losses
  2. Accelerated depreciation (post-1986 purchase)
  3. Net operating loss of individual taxpayer
  4. Installment income of a dealer
  5. Contracts - % completion vs. completed contract
  6. Tax “deductions”
  7. Interest deductions on home “equity loans”
  8. Medical deductions (limited to excess over 10% AGI for age 65+)
  9. Miscellaneous deductions not allowed
  10. Exemptions (personal) and standard deductions
NOTE: #1-5 are timing differences so can increase OR decrease AMTI.
#6-10 can be included in deduction for regular tax purposes, not AMTI so will always increase AMTI
83
Q

2 of 4 (2) Items making up preferences:

A

PPP always an add-back (increase AMTI):

  1. Private activity bond interest income
  2. Percentage depletion the excess over adjusted basis of property
  3. Pre-1987 accelerated depreciation

NOTE: Charity is not added back for AMT

84
Q

3 of 4 AMT credit carryforward period:

A

Can only offset/reduce regular tax, but no future AMT.

The period for carryforward is indefinite.

85
Q

4 of 4 AMT Credits:

A

FACCE

  1. Foreign Tax Credit (mainly tested)
  2. Adoption Credit
  3. Contribution to retirement plans credit
  4. Child Tax Credit
  5. Earned Income Credit
86
Q

Statute of Limitations for general:

A

3 years from the later of:
a. Due date of the return (4/15)
or
b. date the return is filed (including amended returns)

87
Q

Statute of limitation for 25% understatement of gross income:

A

6 years from the later of:
a. due date of the return
OR
b. date the return is filed

88
Q

Statute of limitation for fraud and false returns (ex. bank robbers):

A

No statute of limitations for fraud or filing false returns. Gov’t can assess the filed return for UNLIMITED years.

89
Q

Statute of limitation for bad debts, worthless securities:

A 
Bad luck = 7 years
7 years from the later of:
a. due date of the return
OR 
b. date the return is filed
90
Q

Statute of limitation for refunds and form to be filled:

A

form 1040x (amended return)
Refund claim the later of:
a. 3 years later from the date the return was filed or the original due date of the return
OR
b. 2 years from the time tax was paid (if return was not filed)

91
Q

Other types of refund forms:

A
  1. Form 1139 - claim refund for corporate income taxes
  2. Form 1045 - request quick refund of individual income taxes due to carryback of NOLs
  3. form 843 - request refund of taxes other than income tax
92
Q

Estimated taxes payment requirement:

A

Taxpayer is required to make estimated quarterly tax payments if both conditions are met:
1. $1,000 or more tax liability (excess of tax liability over withholdings is expected to be more than $1,000)
2. Inadequate tax estimates - taxpayer’s withholding is less than the less than the lesser of:
a. 90% of current tax return
OR
b. 100% of last year’s tax (UNLESS, if AGI is over $150,000 or $75,000 for MFS in prior year, must pay 110% of prior year’s tax liability)

93
Q

Penalty for failing to pay estimated tax:

A

No penalty due for balance under $1,000 and IRS may waive the penalty if failure to pay was due to casualty, disaster, illness or death of taxpayer.

94
Q

Tax standards and research - Hierarchy of authority in the tax law:

A
  1. Internal Revenue Code
  2. IRS Regulations (federal tax regulations)
  3. Tax Court Decisions
    4 IRS Agents’ Report
95
Q

AICPA Statements on Standard for Tax Services 7 parts:

A
  1. Tax return positions
  2. Answers to questions on returns
  3. Certain procedural aspects of preparing returns
  4. Use of estimates
  5. Departure from a position previously concluded in an administrative or court hearing
  6. Knowledge of error - return preparation and administrative proceedings
  7. Form and content of advice to taxpayers
96
Q

1 of 7 SSTS - Tax return positions definition:

A

Defined as either:
1. Position taken on tax return that the tax preparer has advised the taxpayer to take
OR
2. Position taken on tax return that the tax preparer has concluded is appropriate based on all the material facts.

97
Q

Tax Return Positions - Realistic Possibility Standard and Reasonable Basis Standard meaning:

A

Tax return position must be realistically possible and reasonable.
Tax preparer should advise client that it might be possible to avoid certain penalties if position is disclosed on the return.
Tax preparer SHOULD NOT advise client to take on a position due to the fact that the client is unlikely to be audited.

98
Q

Tax preparer’s requirement to disclose:

A

Tax preparer should inform taxpayer of penalty risks with respect to tax effects/position of a transaction. Courts will not uphold imposition of a penalty if the transaction, at the minimum, meets the MORE-LIKELY-THAN-NOT standards.

99
Q

2 of 7 - Answers to Questions on Return (tax preparer’s role):

A

Tax preparer should make reasonable effort to obtain information necessary to provide appropriate answers from taxpayer to answer all questions on the return.

NOTE: Not all questions on a return are of equal importance, but the preparer should make a reasonable effort all questions because it can impact the determination of taxable income or loss and tax liability AND/OR failure to answer can result in incomplete return or penalty.

100
Q

2 of 7 - Answers to Questions on Returns, what is considered reasonable grounds for omission?

A
  1. When information are not easily obtainable and insignificant with respect to taxable income or loss or tax liability
  2. Uncertainty with the question in respect to the tax return
101
Q

3 of 7 - Certain Procedural Aspects of Preparing Returns (from tax preparers):

A

Generally no responsibility to verify information provided by taxpayer

102
Q

4 of 7 - Use of Estimates (when preparing returns include:

A
  1. Tax preparer may use estimates provided by taxpayer (if it’s not practical for taxpayer to obtain exact data) unless prohibited by statute or rule.
  2. Disclosure of estimates is not generally required unless it’s an unusual circumstance (if record are destroyed by firm or computer failure).
103
Q

5 of 7 - Departure from a Position Previously Concluded in an Administrative Proceeding or Court Decision (aka change of position) effects?

A

Consistency is not required

104
Q

6 of 7 - Knowledge of Error - Return Preparation and Administrative Proceedings (steps tax preparer should take when an error is identified):

A

Notify taxpayer (either orally or written) and it is up to taxpayer’s responsibility to decide whether to correct the error.

Tax preparer are NOT allowed to notify taxing authority without the taxpayer’s consent to disclose the error.

105
Q

7 of 7 - Form and Content of Advice to Taxpayers:

A

Tax preparer should be professionally competent and should consider taxpayer’s needs when giving tax advice to taxpayer in oral or writing.

CPA - REG (2 decks)

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