Tax Law Compliance Flashcards
What are the more important tax authoritative sources?
IRS Code
Treasury Regulations
Revenue Rulings
Revenue Procedures
What are the 3 groups of tax regulations?
Legislative
Interpretive
Procedural
What are legislative regulations?
Congressional authorization to issue regulations on a particular code section
What are interpretative regulations?
They explain the meaning of a code section
What are procedural regulations?
Regulations that cover such areas as the information a taxpayer must supply to the IRS. Instructions.
What are revenue rulings?
They set a precedence for how the courts interpret tax law
What are revenue procedures?
Procedures which reflect the internal management practices of the IRS that affect the rights and duties of taxpayers
What are private letter rulings?
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.
What is a technical advice memo (TAM)?
A request for advice to resolve a dispute between a taxpayer and auditor over a technicality
What is a (tax) notice?
A public pronouncement that contains official guidance about regulations and interpretation. these carry no weight of the law
What is a [tax] announcement?
A summary of code sections in layman’s terms or a notification of impending tax deadlines
What are [tax] judicial interpretations?
After the taxpayer has exhausted administrative remedies of the IRS, he may appeal to the judicial system, with appeals.
What are tax treaties?
Agreements between the US and other countries regarding the taxation of residents of one country, living in another.
Which constitutional amendment created federal tax law?
16th
What are the three purposes of taxes?
Raising revenue
Economic growth
Price stability
What are the three main sources of tax revenue?
Individual income tax
Corporate tax
Payroll tax
What are the three tax law doctrines?
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.
What is the penalty for failing to withhold taxes from an employee?
The responsible party must pay 100% of the money owed.
What are techniques to legally avoid taxes?
Convert ordinary income to capital gains (0%, 15%, 20%)
Investment in tax advantaged accounts
Muni bonds
REITs
Who are recognized representatives by the IRS on behalf of taxpayers?
Attorneys
CPAs
EAs
Certain unenrolled individuals such as the tax preparer
What document is required for a recognized representative to represent a taxpayer?
A power of attorney
What is the Taxpayer Compliance Measurement Program (TCMP)?
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.
What are targeted programs?
Audits that follow trends as to where under-reported income may occur. Bartenders & waiters for tips, students for unearned income, partnerships, etc.
What are the statute fo limitations for taxes?
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
What are the three types of IRS audits?
Correspondence audits: by mail
An office audit: restricted in scope to a specific item or items
A field audit: an examination of numerous items
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?
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
Who is not required to file a tax return?
Individuals unless their income is equal to or exceeds their standard deduction
- Single
- Head of House
- Surviving Spouse
MFS, must file, period.
When must corporations file taxes?
By the 15th of the third month following their tax year
What are the three types of tax penalty categories and their fee?
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
What is the Step Transaction doctrine?
Doctrine where the courts ignore individual transactions and instead impose tax based on the ultimate economic reality of the entirety of transactions
What is Sham Transaction doctrine?
A disregarded transaction that occurred for the mere purpose of creating a gain or loss - not bona fide
What is Substance Over Form doctrine?
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
What is reallocation of income doctrine?
It is allowed
What happens in the case of debt forgiveness?
It can be recognized as taxable ordinary income
What is the Unreasonable Compensation rule?
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.
