Other Tax Topics Flashcards
What is the first step for federal tax legislation to come into existence?
It is first approved by the House Ways and Means Committee (in the House of Representatives)
Then the whole House can accept or reject the bill as is
What is the second step for federal tax legislation to come into existence?
After the House, the Senate Finance Committee considers it, then the whole Senate
What authority does the Senate have to originate tax bills?
Only as amended onto different legislation
These bills then go back to the House Ways and Means Committee
Is the Senate required to pass the same bill (as is) that is passed through the House?
No, the Senate can amend bills
If there is any disagreement between the House and Senate versions of a bill, how is it resolved?
A Joint Conference Committee, with members from the committees for both the Senate and the House, resolves it – after which the Senate and House must vote on the new version
What is an important purpose of the reports issued by the different committees?
They can be used in courts to better interpret the application of the tax laws
What occurs after a tax bill passes through Congress?
The president can sign (within ten days) or veto it
What occurs if a president vetoes a tax bill?
It can still become part of the IRC if Congress overrules him with a 2/3 vote
What are Treasury regulations?
Authoritative interpretations of the IRC by the U.S. Treasury, having been vested with authority to do so by Congress
These can be proposed, temporary, or final
What authority do proposed, temporary, and final Treasury regulations have?
Proposed = basically none Temporary = force of law for three years Final = force of law indefinitely
Can taxpayers disagree with Treasury regulations’ interpretations of the IRC?
Yes, though the onus is on them to prove it
What is the legislative reenactment doctrine?
If there is a final Treasury regulation that has existed for a long time, then it is treated as having congressional authority even if Congress has not itself amended the IRC with it
What are the different kinds of Treasury regulations?
(1) procedural = govern IRS conduct and what info taxpayers have to report
(2) interpretive = expand upon legislation from committee reports
(3) legislative = stronger than interpretive, these provide new substantive legislation filling in details
What are revenue rulings?
Issued by the IRS national office, they provide guidance for peculiar situations
These interpretations have less force than regulations
What are revenue procedures?
Similar to revenue rulings, but governing administration and procedure rather than the law itself
What are letter rulings?
Interpretations of a very specific transaction given to taxpayer by his request (and for a fee)
What are determination letters?
Unpublished letters from the IRS explaining how they would treat a particular transaction
What are technical advice memoranda (TAM)?
Offer guidance on various issues arising from audits
Issued upon request
What kind of precedent do Federal District Courts establish?
Precedents applicable only within their district
What precedents do appellate courts establish and follow?
They establish precedents for courts of original jurisdiction
They follow precedents from the U.S. Supreme Court
What are tax treaties and how do they relate to tax law?
Any agreement between the U.S. and a foreign country on taxation
If there are any conflicts between tax treaties and tax laws, then the newer item wins
How do due dates generally work?
A return’s due date cannot fall on a weekend or a legal holiday, so it would be pushed to the next available day
How do extensions generally work?
They provide extra time to file the return but not to pay the taxes
Six-month extensions are commonly granted
When are corporate income tax returns and ELP informational returns due?
March 15 (or the equivalent for a different fiscal year)
When are individual returns and returns for partnerships, estates, and trusts due?
April 15 (or the equivalent)
When are tax-exempt organizations’ informational returns due?
May 15 (or the equivalent)
When are tax returns for estates and gifts due?
Estate = nine months following the decedent’s death
Gift = same day as individual return is due
What is a 90-day letter?
A notice of tax deficiency issued by the IRS to a taxpayer who has underpaid
Gives him 90 days to file a petition against the deficiency with the U.S. Tax Court – after which payment is demanded
After a tax deficiency is assessed, what does the IRS do next?
Demands payment – usually within 30 days but sometimes immediately
How does the IRS select returns to audit?
It statistically selects returns most likely to have errors of underpayment, so that the audit efforts pay off
Typically audits returns two years after filing, but large corporations’ returns are audited yearly
What else does the IRS do to uncover tax deficiencies?
Rewards anyone who provides helpful information regarding the deficiencies
What are three different kinds of audits?
(1) correspondence = done without any meeting, usually involving only computational errors
(2) office = held at an IRS office, usually for an individual without business income
(3) field = done at the taxpayer’s (or his representative’s) office, usually if he has substantial business income
What is a revenue agent’s report (RAR)?
The IRS agent’s report on the audit
These can include adjustments to the return – which must be based strictly on IRS policy, rather than their probability of succeeding in court
What does the taxpayer do if he agrees with the adjustments in a RAR?
He would then sign Form 870, a “Waiver of Restrictions on Assessment and Collection of Deficiency in Tax,” which forfeits a right to appeal and to receive a notice of deficiency
What does the taxpayer do if he does not agree with the adjustments in a RAR?
He receives both the RAR and a 30-day letter, which gives him 30 days to appeal to the Appeals Division
If he does not appeal, the IRS sends him a 90-day letter
Under what circumstances must a taxpayer file a written protest with his appeal?
If the alleged deficiency is >$10k or if it is from a field audit
How does the Appeals Division settle appeals?
Based on the probability that the taxpayer’s position would hold up in court (not strictly based on IRS policy)
A TAM favoring the taxpayer settles the case
Can a taxpayer appeal a dispute beyond the IRS?
Yes, he can take it to the courts
What are the different courts of original jurisdiction?
(1) Federal District Court
(2) U.S. Court of Federal Claims
(3) U.S. Tax Court
- (1) and (2) require payment of deficiency before trial
- (2) and (3) forbid a jury trial
What does the Small Cases Division of the U.S. Tax Court cover?
All cases for amounts at or below $50k
What are the appeals one can make beyond a court of original jurisdiction?
(i) Small Cases Division –> no appeal
(ii) U.S. Court of Federal Claims or U.S. Tax Court –> can appeal in U.S. Court of Appeals
(iii) Federal District Court –> can appeal in U.S. Court of Appeals for the Federal Circuit
What are the four conditions a taxpayer must fulfill to place the onus upon the IRS?
(1) substantiate items
(2) maintain records
(3) comply with requests for interviews and info
(4) have a net worth <$7 million
(4) is inapplicable to individuals
What kind of penalties can taxpayers incur?
Both civil and criminal, including for the same activity
What would count as a reasonable cause for a taxpayer to delay payment (and thus not incur penalty)?
If, after filing for a six-month extension, at most 10% of the total tax debt is due when the return is filed
What would not count as a reasonable cause for a taxpayer to delay payment or filing?
(a) delegating the task to someone else
(b) illness (unless incapacitating)
(c) refusal of spouse to comply in joint return
(d) misunderstanding tax law
What are the different kinds of accuracy-related errors?
(1) negligence or disregarding tax law
(2) substantially understating the tax liability
(3) substantially overstating a valuation (usually for charitable contributions)
(4) substantially understating a valuation (usually for gift and estate purposes)
What is the usual penalty for an accuracy-related error?
20% of the amount understated
What is the improper refund claim penalty?
A 20% penalty on any claimed refund that has no reasonable basis
For taxpayers that owe estimated tax payments through the year, when are they due?
April 15, June 15, September 15, and the following January 15 – or the equivalent for a non-calendar fiscal year
Which corporations are required to make estimated tax payments?
Any corporation with a tax liability of at least $500
What do individuals, estates, and trusts need to pay to avoid a penalty for failing to pay estimated taxes?
Either (1) 90% of the current year’s actual tax debt or (2) a “safe harbor percentage” of last year’s tax debt – whichever is lesser
The safe harbor percentage is 110% for AGIs >$150k and 100% for others
What is the statute of limitations for assessing tax penalties?
Ordinarily, it is three years from the due date or filing date (whichever is later), though it is extended to six years for 25% omissions from gross income and indefinitely for fraud
Within what time period can a taxpayer claim a refund?
Either (a) within 3 years from the return’s due date or (b) within two years from the tax’s payment – whichever is later
What kind of multijurisdictional tax issues can arise?
Entities spanning across different tax jurisdictions can shift income around to try to reduce their tax liabilities
What is the Uniform Division of Income for Tax Purposes Act (UDITPA)?
A uniform act which divides up income among different jurisdictions
Uses a formula with a property factor, payroll factor, and sales factor to distribute taxable income across states
When can taxpayers use the cash or accrual bases for accounting?
(1) in general, taxpayers with gross income under $1 mil can use cash method
(2) taxpayers with inventory (e.g. manufacturers) must use accrual method for sales and COGS
(3) corporations must use accrual
- exception: if not a tax-shelter entity, and (a) if a personal service corporation or (b) if having gross income under $5 mil, a corporation can use cash basis
What are the UNICAP rules?
Uniform Capitalization rules – requires taxpayers to capitalize indirect costs and (most) direct costs in producing certain types of property
Which method must be used for long-term contracts?
Percentage-of-completion method – and uses a “look-back” calculation to account for difference between actual final income and estimated final income
The taxpayer can forgo the look-back calculation if each year before completion had an estimated income within 10% of the actual
When can the installment method generally be used to recognize taxable income?
If at least one payment will be received in the following tax year
