Federal Tax Authority, Procedures and Planning

Question 1

What are the three most basic and common types of tax planning?

Answer 1

1. Timing of income recognition
2. Shifting of income among taxpayers and jurisdictions;
   and
3. Conversion of income among high and low rate activities

Question 2

When SHOULD a non-corporate taxpayer elect to forgo Sec. 179 or bonus depreciation deductions?

Answer 2

When the taxpayer has low marginal tax rates in the current year and expects to be in higher marginal rates in the future

WHY? - Because this will result in a smaller total tax liability

Question 3

What is an example of Tax Evasion?

Answer 3

Assigning taxable income to a child’s tax return

i.e. Tax evasion takes place once a tax liability has already been incurred

NOTE: A taxpayer is not permitted to allocate income taxable to the taxpayer to another person

Question 4

WHAT is a means that allows a taxpayer to legally avoid paying income tax?

Answer 4

Treating a portion of compensation as a tax-free fringe benefit

i.e. converting an employer payment to an employee from wages to a tax exempt benefit, allows the taxpayer to legally avoid paying income tax that would otherwise be owed

Question 5

WHAT are the requirements in ]determining if a taxpayer qualifies for head-of-household filing status, and is considered unmarried?

Answer 5

1. The taxpayer filed a separate return
2. The taxpayer paid more than half the cost of keeping up the home for the tax year

3 The taxpayer’s spouse did not live in the home during the last 6 months of the tax year

4. The home was, for more than half the year, the main home of the taxpayer’s child, stepchild, or adopted child, whom the taxpayer or the noncustodial parent can properly claim as a dependent

Question 6

In which court can an individual pursue a claim after their refund was disallowed in an IRS appeals hearing?

Answer 6

U.S. Court of Federal Claims

Question 7

What form would a taxpayer submit for a tentative carryback adjustment to get a quick refund for carryback of a net operating loss, corporate net capital loss, or general business credit?

Answer 7

FORM 1045

Form 1139 for corporations

Question 8

WHICH of the two tax authorities has precedence when a revenue ruling conflicts with a revenue procedure?

Answer 8

The ONE most recently established

i.e. the most recent rule/law takes precedence

Question 9

WHICH court would a taxpayer wishing to reverse the U.S. Tax Court’s ruling appeal to?

Answer 9

THE U.S. Circuit Court of Appeals

i.e. this is considered an appellate court that a taxpayer would appeal to

Question 10

HOW is the (excess) amount of Social Security an employee has had tax withheld treated if that amount is greater than the maximum for a particular year?

Answer 10

AS a credit against income tax, if that excess resulted from correct withholding by TWO or MORE employers

Question 11

When is an accuracy-related penalty imposed on a taxpayer?

Answer 11

When for example an understatement is MORE than the larger of 10% of the correct tax or $5,000

• If this happens the penalty is equal to 20% of the underpayment

Question 12

WHAT is the Statute of Limitations if an omission in excess of 25% of gross income stated in the return occurs?

Answer 12

6 years from the date the return was filed; or the due date

• WHICHEVER is Later

NOTE: This applies even if the omission is made in good faith. If Less than 25%, then the Statute of Limitations is the greater of (a) 3 years from date tax return is filed or (b) 2 years from date tax is paid

Question 13

WHEN can a corporation’s tax year be reopened after all statutes of limitations have expired?

Answer 13

If the corporation prevails in a determination allowing a deduction in an open tax year that was taken erroneously in a closed tax year

Question 14

WHEN must a claim for a refund be filed?

Answer 14

WITHIN 3 years from the filing date of the return or 2 years from the payment of the tax

• whichever is later

NOTE: If no return was filed, the claim for refund is due within 2 years from the time the tax was paid

Question 15

WHAT is the annual estimated payment that must be made by taxpayers’?

Answer 15

THE lesser of (1) 90% of the tax for the current year, or (2) 100% of the tax for the prior year

NOTE: the 100% requirement for the previous year goes to 110% if AGI is over the established threshold

Question 16

What is the calculation for “Net unearned income?”

Answer 16

UNEARNED INCOME minus the sum of

(1) 1,050 (first $1,050 clause)

And

(2) Greater of (a) $1,050 of the standard deduction or $1,050 of itemized deductions or (b) the amount of allowable deductions directly connected with the production of unearned income

Question 17

WHEN would a disclosure of a tax return position reduce or eliminate an accuracy-related penalty on the taxpayer?

Answer 17

When the position does NOT concern a tax shelter and has a reasonable basis

i.e. Positions concerning tax shelters may result in or increase an accuracy-related penalty

Question 18

HOW does the IRS assess a penalty on the taxpayer when an income tax return is filed later than its due date and no extension has been filed?

Answer 18

ON the outstanding taxes due

i.e. the taxpayer receives credit for taxes withheld and the penalty is ONLY assessed on the difference (meaning the outstanding tax liability)

Question 19

When does a taxpayer NOT have to pay their estimated taxes?

Answer 19

WHEN the taxpayer’s earned income credit will exceed their tax liability for the current year

i.e. If tax credits exceed the tax liability, the taxpayer will NOT owe taxes and thus not have to pay any estimated taxes

Question 20

WHAT are the list of courts that are referred to as courts of original jurisdiction, or trial courts, for tax matters?

Answer 20

(1) Tax Court
(2) U.S. District Court; and
(3) U.S. Court of Federal Claims

i.e. There are three levels of federal courts that hear tax cases (trial courts, appellate courts, and high court)