Income Tax Law Fundamentals and Tax Compliance

Question 1

Types of authority

Answer 1

IRC: primary source of all tax law

Treasury Regulations: a source for all tax law

Revenue rulings and Revenue procedures: admin interpretation - may be cited as a precedent

Congressional Committee reports: indicate the intent of Congress - may not be cited as precedent

Private letter rulings: apply to a specific taxpayer in a particular situation

Judicial sources: court decisions interpret law and or facts

Question 2

Step transaction

Answer 2

ignore the individual transactions and instead tax the ultimate transactions

Question 3

Sham transaction

Answer 3

this transaction lacks a business purpose, and economic substance will be ignored for tax purposes

Question 4

Substance over form

Answer 4

the substance of a transaction and not merely its form governs its tax consequences

Question 5

Assignment of income

Answer 5

income is taxed to the tree that grows the fruit although it may be assigned to another prior to receipt

Question 6

Hobby loss

Answer 6

• income is reportable
• TCJA eliminated opportunity to deduct hobby related expenses
• any activity generating income in 3 out of 5 consecutive years is a business not a hobby
• horses: 2 out of 7

Question 7

Tax research sources

Answer 7

Services: information publications, not law and cannot be cited in court
- Federal tax coordinator by RIA
- Federal tax service by CCH

Question 8

Filing requirements

Answer 8

• individuals (US citizens) * income > $400
• dependents
• children under 24 (kiddie tax)
• self employed ( net earning at least $400)
• aliens

Question 9

Filing dates

Answer 9

Estimated taxes
- April 15th
- June 15th
- September 15th
- January 15th

Extension
- 6 mo extension to file (not pay) until October 15th
- Form must show full amount estimated to be due for year but doesn’t need to send payment with it. if additional payments come due, there could be penalty

• IRS checks return for math errors, it results in underpayment the IRS will send corrected balance and require it due without need for court

Question 10

Audit representation

Answer 10

taxpayer may be represented at audit by any attorney, CPA, enrolled agent, enrolled actuary, or other permitted
- CFP not classified

Question 11

Frivolous return

Answer 11

• omits information necessary to determine tax liability
• shows incorrect tax
• desire to impede tax
• penalty is $5,000

Question 12

Negligence

Answer 12

• underpayment is due to negligence or to disregard of rules and regulations without intent to defraud
• penalty is 20% of underpayment
• includes any failure to attempt to comply, exercise care, failure to keep books or records

Question 13

Fraud

Answer 13

• intent to cheat by deliberately understating
• penalty is 75% of underpayment * tax deficiency not interest deficiency

Question 14

Failure to pay

Answer 14

• penalty is 0.5% per month with a max of 25%

Question 15

Failure to file

Answer 15

• penalty is 5% of tax due each month with a max of 25%

Question 16

Estimated tax

Answer 16

to avoid penalty pay the lesser of
1. 90% of current year liability
or
2. 100% of prior year liability (110% if prior year income exceeded 150k)