REG: Chapter 2 Flashcards
Authoritative Hierarchy
What is the purpose of Committee Reports?
- Committee reports determines in the intent that Congress has behind certain tax laws
- The committee reports help examiners properly apply the law
- Can show that the taxpayer’s application of the tax law was in accordance with what is established
- Committee reports are highly authoritative
Authoritative Hierarchy
Why are publications not used as a defense before the Appeals Office?
- Publications are not binding
- They explain the law in plain language for taxpayers and their advisors
Authoritative Hierarchy
What happens when there are conflicting sources of tax law?
The most recent law or rule will be followed
Authoritative Hierarchy
What is the difference between the U.S. Circuit Court of Appeals and the U.S. Court of Appeals for the Federal Circuit?
- U.S. Circuit Court of Appeals hears cases from the U.S. Tax Court and the District Courts
- U.S. Court of Appeals for the Federal Circuit hears cases from U.S. Court of Federal Claims
Authoritative Hierarchy
What are revenue rulings?
- A revenue ruling is the official interpretation of the tax law
- It provides guidance on how the tax law is applied to a set of facts
- Revenue rulings are published to provide guidance
- Revenue rulings do not have the force and effect of treasury regulations
Authoritative Hierarchy
What are revenue procedures?
- A revenue procedure is an official statement that affects the taxpayers
- Revenue procedures do not have force of law, but they can be cited in arguements
Authoritative Hierarchy
What are the levels of courts that can hear tax cases?
- The Tax Court: The taxpayer has not yet settled a tax payment
- U.S. District Court: The taxpayer had settled on any payments first
- U.S. Circuit Court of Appeals: Hears cases from U.S. Tax Court and U.S. District Court
- U.S. Court of Federal Claims: Cases are appealed to the U.S. Court of Appeals for the Federal Circuit
Filing Requirements, Dependents, and Filing Status
What is the unearned income thresholds for Kiddie Tax?
- The first $1,250 of unearned income is exempt from kiddie tax
- The next $1,250 is taxed at the child’s rate
- The first $2,500 of unearned income is exempt from kiddie tax
- The difference between unearned income and $2,500 is subject to kiddie tax
Filing Requirements, Dependents, and Filing Status
What if the child has earned income as well as unearned income?
The standard deduction is limited to the greater of
* $1,250
* Wages plus $400
Filing Requirements, Dependents, and Filing Status
What type of income is included when calculating Kiddie Tax?
- Net Unearned Income
- Dividend Income
Net unearned income is not included because it is taxed on the dependent at the parent’s marginal tax rate
Filing Requirements, Dependents, and Filing Status
What are the types of unearned income when calculating Kiddie Tax?
- Interest
- Dividends
- Capital Gains
- Trust Distributions
- Gifts
- Debt Cancellation
- Pension/Annuities
- Social Security
- Royalties
Filing Requirements, Dependents, and Filing Status
What does a surviving spouse, who has no children, file the year of death and after?
- Married, filing jointly in the first year
- Single all subsequent years
Filing Requirements, Dependents, and Filing Status
What is the filing date for a Corporation to file Form 7004?
- 15th day of 4th month after the closing of the tax year
- An extension may be filed for an automatic 6-month extension
Filing Requirements, Dependents, and Filing Status
What are the requirements for filing as Qualifying Surviving Spouse?
- The surviving spouse can file as Qualifying Surviving Spouse for 2 years after the year of death
- The individual’s spouse must have died during one of the 2 previous tax years
- The taxpayer’s residence must be the principal residence for the dependents during the entire year
Filing Requirements, Dependents, and Filing Status
What are considered costs for maintaining a household?
- Food
- Rent
- Real Estate Taxes
- Utilities
Filing Requirements, Dependents, and Filing Status
What are the qualifications to file as Head of Household?
- Taxpayer files a separate return
- Taxpayer does not file as qualifying surviving spouse
- Taxpayer paid for more than half of the costs of maintaining a home
- Spouse did not live in the home during the last 6 months of the year
- For more than a year, the home was the main home to the taxpayer, their children, step children, adopted children or where the taxpayer is a noncustodial parent
Filing Requirements, Dependents, and Filing Status
What are the qualifications to file as Qualifying Surviving Spouse?
- The taxpayer did not remarry during the year
- Taxpayer was able to file married, filing jointly at the tax year of the spouse’s death
- Taxpayer paid for more than half of the costs of maintaining a home
- For more than a year, the home was the main home to the taxpayer, their children, step children, adopted children (Foster children do not qualify)
Filing Requirements, Dependents, and Filing Status
Who are considered qualified dependents
The person cannot have gross income more than $4,700
* Children, including step children, adopted, foster child
* Parent
* Sibling, including step siblings, half siblings, adopted siblings
* Grandparents
* Grandchildren
* Aunt and Uncles
* Nephews and Nieces
Filing Requirements, Dependents, and Filing Status
What type of filing is done when the a surviving spouse dies in the same year in the death of the spouse?
The filing for the deceased spouse will be Married, filing separately
Filing Requirements, Dependents, and Filing Status
What type of return does a taxpayer file when they are legally separated and living in different households?
Single
Filing Requirements, Dependents, and Filing Status
What are the requirements for reporting on foreign bank accounts?
If the aggregate value of a foreign accounts is $10,000 during the tax year
* Taxpayer must file a form FinCEN Report 114 (FBAR)
* Filing must be done by April 15th, extension October 15th
* The report is filed electronically through the bank’s e-file system
If the aggregate value at the end of the year is $50,000 or was $75,000 at any time during the tax year
* Taxpayer must file a form 8938, in addition to Report 114
Payments, Penalties, and Refunds
What are the ways to make estimated tax payments in order to prevent paying a penalty?
Lesser of:
* 90% of the current year’s tax liability
* 100% of the prior year’s tax liability if AGI is less than $150,000
* 110% of the prior tax liability if AGI is equal or more than $150,000
* Quarterly installments of 25% of the previous year’s tax liability
Payments, Penalties, and Refunds
What is the penalty fee for failure to pay by the due date?
- 0.5% of the tax amount due for each month unpaid
- The maximum penalty is 25% of unpaid taxes
Payments, Penalties, and Refunds
What is the penalty when a taxpayer files a fraudulent tax return?
Lesser of:
* 15% of the unpaid taxes per month
* 75% of the tax owed
Payments, Penalties, and Refunds
What is the penalty fee for failure to file by the due date?
- 5% of the tax amount due for each month unpaid
- The maximum penalty is 25% of unpaid taxes
If the return is filed more than 60 days late, the penalty is the lesser of:
* $485, or
* 100% of the tax due
Payments, Penalties, and Refunds
What is the penalty for the taxpayer when they are late paying their taxes?
Lesser of:
* 0.5% of the unpaid taxes for each month
* 25% of the unpaid tax
Payments, Penalties, and Refunds
What is the penalty for inaccruate reporting?
- The penalty is 20% of the underpayment
If there is a substantial understatement of income, the tax penalty is the greater of
* 10% of tax required to be shown on the return, or
* $5,000/$10,000,000 for corporations
Payments, Penalties, and Refunds
What is the penalty if a deduction is incorrectly filed as a Sec. 199A business deduction?
The greater of:
* 5% of the tax to be shown on the tax return, or
* $5,000
Payments, Penalties, and Refunds
What is the statute of limitations for taxpayer penalties?
- 3 years from the date the return was filed
- If the date of the return is April 15, 2024, the statute will expire on April 15, 2027
- If the penalty is more than 25% of gross income reported on the return, then the statute of limitations is 6 years
Payments, Penalties, and Refunds
What are the statute of limitations for taxes?
Paying taxes
* 3 years from the date the return was filed
* If omission is 25% or more, then 6 years
* Use the date due if the date was filed was before the due date
Claim a refund
* The later of 3 years from the return due date or two years from when the tax was paid
* If a return was not filed, 2 years from when the tax was paid
Payments, Penalties, and Refunds
What is the statute of limitations for refunds?
A claim must be filed based on a filed return by the later of:
* 3 years from the due date of the return, or 3 years, 3 months and 15 days after the end of the calendar year
* 2 years after the taxes are paid
If a return has not been filed, a claim for a refund may be filed within 2 years after filing and paying a tax
Payments, Penalties, and Refunds
What does the statute of limitations for S Corp begin?
- Returns for S corp are due on March 15th
- The statute of limitations will begin the day after the last day of filing, which is March 16th
Payments, Penalties, and Refunds
What would cause too much social security tax to be withheld?
- The overpayment occurs when withholding is done by two or more employers
- The extra social security tax can be applied as a credit to reduce income taxes
Payments, Penalties, and Refunds
What is considered a substantial understatement?
The understatement is more than the larger of:
* 10% of the correct tax
* $5,000
Payments, Penalties, and Refunds
What is the taxpayer’s response time after receiving a notice from the IRS?
- Taxpayer’s address is in the U.S.: 90 days
- Taxpayer’s address is outside of the US: 150 days
Payments, Penalties, and Refunds
What option does a taxpayer have if they do not want to pay the deficiency to the IRS?
The taxpayer may petition the U.S. Tax Court
Accounting Periods and Methods
How is gain recognized using the installment method (Sec. 453)?
The gain recognized equals
Proceeds received in the current year
x Gross Percentage Profit
Accounting Periods and Methods
When is the accrual method of tax reporting mandatory?
- When the taxpayer maintains inventory
- A non-small business manufacturer
- The accrual method must be used in regarding to purchases and sales
- The accrual method is not mandatory for accounts receivable
Accounting Periods and Methods
What companies are required to use the accrual method?
- C Corporations
- Partnerships that have a C Corp partner
- Trust that may be taxed on unrelated income
- Tax shelters
Accounting Periods and Methods
What is included in Gross Income in the cash basis of accounting?
- Bank Deposits
- FMV of promissory notes
- Monies received by the agent (even if it was deposited at a later date)
Accounting Periods and Methods
How are prepaid rent and security deposits reported in gross income?
- For prepaid rent, if there are no restrictions, then the amount is included in gross income
- For the security deposit, if the security deposit is refundable, the amount is not included in gross income
Tax-Exempt Organizations
What organizations are not considered 501(c)(3) exempt?
- Privately owned nursing homes
- Individuals
- Partnership
- S-Corp shareholders
- Community Savings and Loan Associations
Tax-Exempt Organizations
When does a private foundation lose it’s exempt status?
- A private foundation has annual gross receipts over $5,000
- When it becomes a public charity
- The foundation will become a public charity if it receives more than 1/3 support annually from its members and the general public
Tax-Exempt Organizations
What is a feeder organization?
- An organization that feeds its profits to another organization
- It is not considered an exempt organization because all of the profits go to the exempt organization
Tax-Exempt Organizations
When an exempt organization exceeds the lobbying spending limit, how is the expenditure calculated?
A 25% excise tax will be incurred based on the overspent amount
