REG 6 - Other Entity Taxation Flashcards
Simple Trusts
1) Only make distributions out of current income (not principal)
2) Required to distribute all of its current income
3) CANNOT take a charitable contribution deduction
4) $300 exemption to arrive at taxable income
Complex Trusts
1) May accumulate current income
2) May distribute out of principal
3) May deduct charitable contributions
4) $100 exemption
Gift Tax exclusion
Gifts of $15,000 or less per year per recipient are excluded
*lifetime exclusion is 11,700,000
Gifts with unlimited exclusion
1) Payments made DIRECTLY to an education institution
2) Payments made DIRECTLY to a health care provider
3) Charitable gifts
4) Marital deduction
Gifts: Present interest vs Future interest
Present interest - qualifies for the annual gift exclusion
Future interest - does not qualify
Future interest examples
- Reversions (gifting assets and later getting them back)
- Remainders (future distributions)
- Trust income interests where accumulation of income is mandatory
- present interest without ascertainable value
Present interest examples
- Trust income interest where distribution is mandatory
- life estates
- bonds or notes
- unrestricted transfers of life insurance policies
Gifts: Compete vs Incomplete
Complete Gifts - subject to gift tax and qualify for the annual exclusion
Incomplete Gifts - not subject to gift tax. Incomplete if gift is conditional or revocable
Unrelated business income
Income that is:
- derived from an activity that constiutes a trade or business
- regularly carried on
- not substantially related to the organizations tax exempt purpose
Excluded trade or business activities (not taxed)
- Bingo games
- Trade show activities
- Sale of merchandise received as a gift
- Activity where all the work is performed by unpaid volunteers
Excluded types of income (not taxed)
- Dividends, interest, investment income
- Royalties
- Rents from real property
- Research income
- Gains and losses on property not held primarily for sale
Subpart A of Circular 230 applies to
- Attorney
- CPAs
- “enrolled”
- “registered”
What to do and not to do when you become knowledgeable of a client omission under Circular 230
DO: - Notify client - Advise client of the potential penalties DONT: - Withdraw until they correct the error - Notify the IRS
Practice by former government employees rules under Circular 230
1) “personally and substantially participated” in a particular matter - can never represent or assist with respect to that matter
2) “official responsibility” - cannot represent within 2 years of leaving government
3) “participated in the development of the rule” - cannot represent within 1 year of leaving government
Best practices for tax advisors Circular 230
1) Communicate the terms of the engagement
2) Establish facts, arrive at a conclusion supported by the law and facts
3) Advise the client on the importance of the conclusion (ex. penalty implications)
Tax preparer vs. tax practitioner
- Tax practitioner have a license and therefore unlimited representation rights.
- Tax preparer with no credentials generally has no authority to represent clients before the IRS. A tax preparer is anyone who fills out taxes for a fee
Signing tax return preparer
Has primary responsibility for the overall accuracy of the return
Nonsigning tax return preparer
Not primary responsibility
More likely than not standard
> 50% likelihood a tax position holds up in court
Reasonable basis
> 20% likelihood a tax position holds up in court
Substantial authority standard
> 40% but <50% likelihood a tax position holds up in court
Unreasonable Position
A position is deemed unreasonable UNLESS:
1) substantial authority (40-50%) exists, regardless of disclosure
2) reasonable basis (20%) for a disclosed position
3) a tax shelter or reportable transaction would meet the more likely than not standard (50%)
Penalty for understatement due to unreasonable position
Greater of:
- $1,000
- 50% of the income the preparer received
Penalty for “willful or reckless” conduct
Greater of:
- $5,000
- 75% of the income the preparer received
General rule for supporting documentation required for preparer
Not required to obtain supporting documentations UNLESS the preparer has reason to suspect the accuracy of the information provided. Need to make reasonable inquires if the information appears incorrect or incomplete
Commonly tested tax return preparer penalties
1) Endorsing and cashing refund checks in forbidden ($545 fee)
2) Preparing returns that understate tax liability (willfully aiding $1,000)
3) Wrongful disclosure of tax information ($250 fee)
Appeals Process
1) Attempt to resolve the issue with a revenue agent
2) If agreement cannot be reached at the revenue agent level, the taxpayer receives a 30 day letter which gives them 30 days to request an administrative appeal.
3) If they can still not agree a 90 day letter is issued. Taxpayer has 90 days to pay the deficiency or file a petition with US Tax Court where they don’t have to pay before they go. They can have their case heard at US District Court or US Court of Federal Claims but they’ll have to pay ahead of time then sue IRS for what they paid
US Tax Court
- No payment required to get trial
- No Jury, trial is in front of one judge who is a tax law expert
- Issues are either:
1) Regular decision : a new or unusual case
2) Memorandum decision: application of existing law
US District Courts
- Pay and sue for refund
- Jury trial is an option, judges are not tax experts
US Court of Federal Claim
- Pay and sue for refund
- No jury trial option
Failure to file penalty
5% of amount due per month
*is both failure to file and to pay penalties are due, failure to file penalty is reduced by the failure to pay penalty
Failure to pay penalty
1/2 of 1% per month
Negligence penalty with respect to an understatement of tax (not substantial)
20% of the understatement
Substantial understatement of tax penalty
20% of the understatement, harder to avoid than the one above
Tax returns that you are not avoiding any of the penalties
- Frivolous tax return
- patently improper
- merely arguable, <20%
Reasonable basis standard to avoid penalties
Will avoid most penalties if you tax position has >20% chance of succeeding.
- Avoids non substantial negligence penalty without disclosure
- Avoids substantial understatement penalty as long as the taxpayer disclosed the tax return position
Reportable Transaction
A transaction identified by the Secretary of US Treasury as potential avoidable or evadible
General avoidance of penalties
A taxpayer can generally avoid any penalty by showing that they (“reasonable basis” >20%):
1) had a reasonable cause to support their tax position
2) acted in good faith
3) did not have willful neglect
- DOES NOT APPLY IF:
1) Tax shelter > 50%
2) substantial and “undisclosed” understatement 40%-50%
How to tell if a understatement of tax is substantial for individuals
An understatement is substantial if it exceeds the greater of:
1) 10% of the correct tax
2) 5,000
How to tell if a understatement of tax is substantial for corporations
An understatement for corporations is substantial if it exceeds the lesser of: 1) 10,000,000 The greater of : 2a) 10,000 2b) 10% of the correct tax
