Tax Law Compliance

Question 1

What are the more important tax authoritative sources?

Answer 1

IRS Code
Treasury Regulations
Revenue Rulings
Revenue Procedures

Question 2

What are the 3 groups of tax regulations?

Answer 2

Legislative
Interpretive
Procedural

Question 3

What are legislative regulations?

Answer 3

Congressional authorization to issue regulations on a particular code section

Question 4

What are interpretative regulations?

Answer 4

They explain the meaning of a code section

Question 5

What are procedural regulations?

Answer 5

Regulations that cover such areas as the information a taxpayer must supply to the IRS. Instructions.

Question 6

What are revenue rulings?

Answer 6

They set a precedence for how the courts interpret tax law

Question 7

What are revenue procedures?

Answer 7

Procedures which reflect the internal management practices of the IRS that affect the rights and duties of taxpayers

Question 8

What are private letter rulings?

Answer 8

Similar to revenue rulings only a PLR is an answer to a specific question asked by a specific person. In other words, it is an answer to a question asked regarding an individuals taxes.

Question 9

What is a technical advice memo (TAM)?

Answer 9

A request for advice to resolve a dispute between a taxpayer and auditor over a technicality

Question 10

What is a (tax) notice?

Answer 10

A public pronouncement that contains official guidance about regulations and interpretation. these carry no weight of the law

Question 11

What is a [tax] announcement?

Answer 11

A summary of code sections in layman’s terms or a notification of impending tax deadlines

Question 12

What are [tax] judicial interpretations?

Answer 12

After the taxpayer has exhausted administrative remedies of the IRS, he may appeal to the judicial system, with appeals.

Question 13

What are tax treaties?

Answer 13

Agreements between the US and other countries regarding the taxation of residents of one country, living in another.

Question 14

Which constitutional amendment created federal tax law?

Answer 14

16th

Question 15

What are the three purposes of taxes?

Answer 15

Raising revenue
Economic growth
Price stability

Question 16

What are the three main sources of tax revenue?

Answer 16

Individual income tax
Corporate tax
Payroll tax

Question 17

What are the three tax law doctrines?

Answer 17

Business purpose doctrine: the business has to be valid. A taxpayer can’t start a corporation just to be taxed at the lower 21% rate

Assignment of income doctrine: “the fruit of the tree”. The taxpayer can’t reassign income to a lower bracket taxpayer

Tax benefit rule or doctrine: converts otherwise nontaxable income, into taxable income. Ex: a healthcare deduction taken from an expense in a previous year, will pay taxes if that medical expense was reimbursed in the following year.

Question 18

What is the penalty for failing to withhold taxes from an employee?

Answer 18

The responsible party must pay 100% of the money owed.

Question 19

What are techniques to legally avoid taxes?

Answer 19

Convert ordinary income to capital gains (0%, 15%, 20%)
Investment in tax advantaged accounts
Muni bonds
REITs

Question 20

Who are recognized representatives by the IRS on behalf of taxpayers?

Answer 20

Attorneys
CPAs
EAs
Certain unenrolled individuals such as the tax preparer

Question 21

What document is required for a recognized representative to represent a taxpayer?

Answer 21

A power of attorney

Question 22

What is the Taxpayer Compliance Measurement Program (TCMP)?

Answer 22

An audit of about 55,000 returns every two years to look for common trend areas where taxpayers may attempt to cheat. It is also a way to instill fear in the taxpayer that they may get audited, so they ought to complete their taxes correctly.

Question 23

What are targeted programs?

Answer 23

Audits that follow trends as to where under-reported income may occur. Bartenders & waiters for tips, students for unearned income, partnerships, etc.

Question 24

What are the statute fo limitations for taxes?

Answer 24

3 years from filing date of return
6 years from filing date if over 25% of gross income is under-reported
No statute if taxes not filed or a fraudulent return is filed

Question 25

What are the three types of IRS audits?

Answer 25

Correspondence audits: by mail
An office audit: restricted in scope to a specific item or items
A field audit: an examination of numerous items

Question 26

What are the safe harbor rules for not paying estimated tax payments? in other words, how much does one need to pay for estimated quarterly taxes?

Answer 26

For previous year AGI under $150,000…
-The lesser of 90% of their current year’s tax liability or 100% of their previous year’s tax as long as it was 12 months minus any current year withholding

For previous year AGI over $150,000…
-The lesser of 90% of their current year’s tax liability or 110% of their previous year’s tax as long as it was 12 months minus and current year withholding

Question 27

Who is not required to file a tax return?

Answer 27

Individuals unless their income is equal to or exceeds their standard deduction

• Single
• Head of House
• Surviving Spouse

MFS, must file, period.

Question 28

When must corporations file taxes?

Answer 28

By the 15th of the third month following their tax year

Question 29

What are the three types of tax penalty categories and their fee?

Answer 29

Failure to file: 5% penalty per month up to 25%
Failure to pay: .5% penalty per month up to 25%
Underpayment: 90% / 100% is the least penalty
-Criminal fraud (evasion): heavy fines, jail, or both
-Civil fraud (not quite evasion): additional 75% penalty
-Negligence (inaccuracy): 20%
-Frivolous return (some and purposeful omission - to make the IRS life hard): $5000 per occurance

Question 30

What is the Step Transaction doctrine?

Answer 30

Doctrine where the courts ignore individual transactions and instead impose tax based on the ultimate economic reality of the entirety of transactions

Question 31

What is Sham Transaction doctrine?

Answer 31

A disregarded transaction that occurred for the mere purpose of creating a gain or loss - not bona fide

Question 32

What is Substance Over Form doctrine?

Answer 32

A look at the substance of a transaction vice its mere form. Ex: Person A sells an item to person B at a loss. Person B sells the same type item to person A at a loss. The transaction is not recognized, but instead a like-kind exchange

Question 33

What is reallocation of income doctrine?

Answer 33

It is allowed

Question 34

What happens in the case of debt forgiveness?

Answer 34

It can be recognized as taxable ordinary income

Question 35

What is the Unreasonable Compensation rule?

Answer 35

Corporate tendencies is to pay all corporate distributions as pay or bonuses so they can take the deductions. The IRS may reclassify payments as dividends to employees if the payments or bonuses are deemed excessive.