Other Tax Topics

Question 1

What is the first step for federal tax legislation to come into existence?

Answer 1

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

Question 2

What is the second step for federal tax legislation to come into existence?

Answer 2

After the House, the Senate Finance Committee considers it, then the whole Senate

Question 3

What authority does the Senate have to originate tax bills?

Answer 3

Only as amended onto different legislation

These bills then go back to the House Ways and Means Committee

Question 4

Is the Senate required to pass the same bill (as is) that is passed through the House?

Answer 4

No, the Senate can amend bills

Question 5

If there is any disagreement between the House and Senate versions of a bill, how is it resolved?

Answer 5

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

Question 6

What is an important purpose of the reports issued by the different committees?

Answer 6

They can be used in courts to better interpret the application of the tax laws

Question 7

What occurs after a tax bill passes through Congress?

Answer 7

The president can sign (within ten days) or veto it

Question 8

What occurs if a president vetoes a tax bill?

Answer 8

It can still become part of the IRC if Congress overrules him with a 2/3 vote

Question 9

What are Treasury regulations?

Answer 9

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

Question 10

What authority do proposed, temporary, and final Treasury regulations have?

Answer 10

Proposed = basically none
Temporary = force of law for three years
Final = force of law indefinitely

Question 11

Can taxpayers disagree with Treasury regulations’ interpretations of the IRC?

Answer 11

Yes, though the onus is on them to prove it

Question 12

What is the legislative reenactment doctrine?

Answer 12

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

Question 13

What are the different kinds of Treasury regulations?

Answer 13

(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

Question 14

What are revenue rulings?

Answer 14

Issued by the IRS national office, they provide guidance for peculiar situations

These interpretations have less force than regulations

Question 15

What are revenue procedures?

Answer 15

Similar to revenue rulings, but governing administration and procedure rather than the law itself

Question 16

What are letter rulings?

Answer 16

Interpretations of a very specific transaction given to taxpayer by his request (and for a fee)

Question 17

What are determination letters?

Answer 17

Unpublished letters from the IRS explaining how they would treat a particular transaction

Question 18

What are technical advice memoranda (TAM)?

Answer 18

Offer guidance on various issues arising from audits

Issued upon request

Question 19

What kind of precedent do Federal District Courts establish?

Answer 19

Precedents applicable only within their district

Question 20

What precedents do appellate courts establish and follow?

Answer 20

They establish precedents for courts of original jurisdiction

They follow precedents from the U.S. Supreme Court

Question 21

What are tax treaties and how do they relate to tax law?

Answer 21

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

Question 22

How do due dates generally work?

Answer 22

A return’s due date cannot fall on a weekend or a legal holiday, so it would be pushed to the next available day

Question 23

How do extensions generally work?

Answer 23

They provide extra time to file the return but not to pay the taxes

Six-month extensions are commonly granted

Question 24

When are corporate income tax returns and ELP informational returns due?

Answer 24

March 15 (or the equivalent for a different fiscal year)

Question 25

When are individual returns and returns for partnerships, estates, and trusts due?

Answer 25

April 15 (or the equivalent)

Question 26

When are tax-exempt organizations’ informational returns due?

Answer 26

May 15 (or the equivalent)

Question 27

When are tax returns for estates and gifts due?

Answer 27

Estate = nine months following the decedent’s death

Gift = same day as individual return is due

Question 28

What is a 90-day letter?

Answer 28

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

Question 29

After a tax deficiency is assessed, what does the IRS do next?

Answer 29

Demands payment – usually within 30 days but sometimes immediately

Question 30

How does the IRS select returns to audit?

Answer 30

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

Question 31

What else does the IRS do to uncover tax deficiencies?

Answer 31

Rewards anyone who provides helpful information regarding the deficiencies

Question 32

What are three different kinds of audits?

Answer 32

(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

Question 33

What is a revenue agent’s report (RAR)?

Answer 33

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

Question 34

What does the taxpayer do if he agrees with the adjustments in a RAR?

Answer 34

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

Question 35

What does the taxpayer do if he does not agree with the adjustments in a RAR?

Answer 35

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

Question 36

Under what circumstances must a taxpayer file a written protest with his appeal?

Answer 36

If the alleged deficiency is >$10k or if it is from a field audit

Question 37

How does the Appeals Division settle appeals?

Answer 37

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

Question 38

Can a taxpayer appeal a dispute beyond the IRS?

Answer 38

Yes, he can take it to the courts

Question 39

What are the different courts of original jurisdiction?

Answer 39

(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

Question 40

What does the Small Cases Division of the U.S. Tax Court cover?

Answer 40

All cases for amounts at or below $50k

Question 41

What are the appeals one can make beyond a court of original jurisdiction?

Answer 41

(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

Question 42

What are the four conditions a taxpayer must fulfill to place the onus upon the IRS?

Answer 42

(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

Question 43

What kind of penalties can taxpayers incur?

Answer 43

Both civil and criminal, including for the same activity

Question 44

What would count as a reasonable cause for a taxpayer to delay payment (and thus not incur penalty)?

Answer 44

If, after filing for a six-month extension, at most 10% of the total tax debt is due when the return is filed

Question 45

What would not count as a reasonable cause for a taxpayer to delay payment or filing?

Answer 45

(a) delegating the task to someone else
(b) illness (unless incapacitating)
(c) refusal of spouse to comply in joint return
(d) misunderstanding tax law

Question 46

What are the different kinds of accuracy-related errors?

Answer 46

(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)

Question 47

What is the usual penalty for an accuracy-related error?

Answer 47

20% of the amount understated

Question 48

What is the improper refund claim penalty?

Answer 48

A 20% penalty on any claimed refund that has no reasonable basis

Question 49

For taxpayers that owe estimated tax payments through the year, when are they due?

Answer 49

April 15, June 15, September 15, and the following January 15 – or the equivalent for a non-calendar fiscal year

Question 50

Which corporations are required to make estimated tax payments?

Answer 50

Any corporation with a tax liability of at least $500

Question 51

What do individuals, estates, and trusts need to pay to avoid a penalty for failing to pay estimated taxes?

Answer 51

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

Question 52

What is the statute of limitations for assessing tax penalties?

Answer 52

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

Question 53

Within what time period can a taxpayer claim a refund?

Answer 53

Either (a) within 3 years from the return’s due date or (b) within two years from the tax’s payment – whichever is later

Question 54

What kind of multijurisdictional tax issues can arise?

Answer 54

Entities spanning across different tax jurisdictions can shift income around to try to reduce their tax liabilities

Question 55

What is the Uniform Division of Income for Tax Purposes Act (UDITPA)?

Answer 55

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

Question 56

When can taxpayers use the cash or accrual bases for accounting?

Answer 56

(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

Question 57

What are the UNICAP rules?

Answer 57

Uniform Capitalization rules – requires taxpayers to capitalize indirect costs and (most) direct costs in producing certain types of property

Question 58

Which method must be used for long-term contracts?

Answer 58

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

Question 59

When can the installment method generally be used to recognize taxable income?

Answer 59

If at least one payment will be received in the following tax year