Unit 1 - Preliminary Work With Taxpayer Data Flashcards
SSN
Social Security Number
ITIN
Individual Taxpayer Identification Number
Apply for # - nonresident aliens with us tax liability
Nonresident spouse of us citizen filing joint return
Taxpayers with ITIN don’t qualify for the earned income tax credit
Number is for tax reporting only
ATIN
Cannot me used for…
Adoption taxpayer identification number
For children not yet eligible for a SSN
REQUESTED USING FORM W-7A (application for taxpayer identification number for pending US adoptions.)
Expires 2 years after issued. Extension can be requested form 15100
ATIN cannot be used for
* earned income tax credit
* child tax credit
* American opportunity tax credit
IP PIN
Identity protection personal identification number
Using prior years tax returns
Tax professionals are required to review prior year tax returns for accuracy and completeness.
If errors discovered - required to inform tax payer of mistake and consequences
What from previous tax returns can affect current year returns
Carryovers
Net operating losses
Tax credit carryovers (AMT Tax credit or Adoption credit)
Prior year depreciation and asset basis
Taxpayers biographical information needed
Legal name, DOB, marital status
Residency status and/or citizenship
Dependent information
Taxpayer identification number (TIN)
SSN. ITIN. ATIN
Types of taxpayer identification numbers (TINs)
Social Security number SSN
Individual taxpayer identification number ITIN
adoption taxpayer identification number. ATIN
ITIN application process
Fill out form W-7 (Application for IRS individual taxpayer identification number)
Prove foreign status and verify identity
3 ways to apply
- form W-7
- use an IRS authorized certified acceptance agent (CAA) - they can authenticate a passport or birth certificates so they don’t have to mail the original documents
- in person at designated IRS taxpayer assistance center
ITINs expire unless renewed
Special rules - deceased child
BORN AND DIED IN SAME YEAR - can still claim as a dependent
Paper return, include birth certificate or hospital medical record.
Stillborn doesn’t qualify
No SS… in space, write DIED
Individual record keeping requirements
At least 3 years from date due or filed (later)
Records of …
Income
Expenses
Home purchase and sale
Investments
Form 1040
It is the primary tax form used by US taxpayers to file their annual income tax returns.
It includes three numbered schedules
Form 1040 - schedule 1
Reports additional income and adjustments to income
Taxable, alimony, unemployment, compensation, and gambling winnings.
Adjustments to income like the student loan, interest, deduction, the self-employed health, insurance, deduction, and the deduction for educator expenses
Form 1040 - schedule 2
Additional taxes owed
Alternate minimum tax, self-employment tax, or household employment taxes
Form 1040 - schedule 3
Additional payments and credits… Two main sections…
Nonrefundable credits
Other payments and refundable credits
Form 1040-SR
For seniors 65 and older
Same as 1040 but easier to read and bigger font
Form 1040-NR
Nonresident aliens report us source income only
Would need an ITIN
Not a us citizen or national, not passed the green card test, or substantial presence test.
Used by foreign investors, or non resident taxpayers who earn money in the US.
Nonresident alien tax rate
Flat 30%, unless there is a tax treaty…
Form 1040-X
Amended US individual income tax return
This form is to correct errors in a previously filed form 1040 form 1040 SR or 1040 NR
Can be filed electronically
Federal income tax rates
7 tax brackets
10, 12, 22, 24, 32, 35, and 37
Tax rate applies ONLY to the additional income within that bracket.
AMT
Alternative minimum tax (its a parallel tax)
Taxpayer has to pay the regular tax or AMT (whichever is greater tax)
Tax return due date
April 15 or if it is on a Saturday Sunday or legal holiday the due date is extended until the next business day
Must be postmarked by that date and mailed
It’s called the mailbox rule
E-filed tax returns are given an electronic postmark to indicate the day they are accepted and transmitted to the IRS
Filing for an extension
File form 4868 called the application for automatic extension of time to file
Can be filed electronically
Must be filed by the original due date
Grants you an additional six months to file tax return, due date October 15
Does not extend the time to pay any tax due, taxpayers must estimate and pay taxes by the original filing deadline
Filing deadline exceptions
Filing status is suspended until the end of the postponement.
Federal disaster areas (located in, records located in, relief worker)
Auto 2 month extension:
NR aliens with no WAGE income On active military service duty outside the USA US citizens and residents living outside the us or PR and main place of business is outside too
Must attach statement of what qualified them for 2 month extension
Still must pay interest on any tax not paid by April 15
IRS Penalties and interest
Failure to file
Failure to pay
Failure to pay properly estimated tax
Interest on the amount due
Failure to file
A taxpayer does not file their tax return by the return due date or extended due date an extension to file is requested and approved
5% of the unpaid taxes for each month or part of a month that a return is late
The penalty is based on the tax that is not paid by the due date
Penalty will not exceed 25% of taxpayers unpaid taxes
Returns more than 60 days late. The penalty equals the lesser of $485 or 100% of the tax due on the return.
Failure to pay penalty
An extension does not give you a payment extension. Tax payments are still due by April 15.
Failure to pay penalty equals 1/2 of one percent of unpaid taxes for each month or part of a month after the due date
A taxpayer may request penalty abatement due to reasonable cause
Interest on the penalty amount due
In addition to penalties, the tax pay will also be charged interest on the amount due
Interest rate is determined quarterly and is the federal short term rate +3%. Interest compounds daily.
Estimated taxes for individuals
The federal income tax is a pay as you go tax and people need to pay most of their tax during the year.
There is no underpayment penalty if the total tax liability on the return is under $1000
No estimated tax payments are required if they had zero tax liability in the prior year
Safe Harbor rule : need tax withheld to be lessor of
100% prior year tax liability
90% current year expected liability
Safe harbor rule for higher income (150,000)
110% prior year tax liability
90% expected
Estimated tax filing and due dates
Taxpayer must complete form 1040 – ES the estimated tax for individuals to pay estimated tax
If a payment is mailed, the date of the US postmark is considered the date of payment
First payment due April 15
Second payment due June 15
Third payment due September 15
Fourth payment due January 15 of the following year
Request a waiver of the estimated tax penalty
Use form 2210, underpayment of estimated tax by individuals estates and trust.
This is called the annualized income installment method
Estimated taxes for farmers and fisherman
Special rules apply to the payment of estimated tax by qualified farmers and fisherman, those who file on schedule F.
If at least 2/3 of the taxpayers gross income in the current year comes from farming or fishing activities….
Taxpayer does not have to pay estimated tax if you files his return and pays all tax due by 1 March
If the taxpayer must pay estimated tax, he is required to make only one estimated tax payment by January 15
Backup withholding
There are times and entity is required to withhold a certain amount from a payment and remit the tax amount to the IRS.
An accurate Social Security number or taxpayer identification number Delinquent tax or failure to report all interest and dividends and other income
Current Back Up withholding rate is 24% for all US citizens and legal US residence.
Non-resident alien withholding is 30% unless an exemption or tax treaty applies.
Earned income
All taxable income earned through work such as wages, salary, tips, and other forms of employee compensation, including self-employment earnings from business or farm ownership
Unearned income
Other types of income, such as interest, income, dividends, capital gains, retirement, income, gambling, winnings, and prizes
Filing thresholds
The determination of whether a taxpayer must file a federal income tax return by their gross income
Filing threshold – single
$13,850
65 or older equals an additional $1850.
Filing threshold – married filing jointly
$27,700
65 and older equals an additional $1500 for each spouse that age
Filing threshold – qualifying surviving spouse
$27,700
65 and older equals an additional $1500 for each spouse that age
Filing threshold – married filing separate
Five dollars regardless of the age
Filing threshold – head of household
$20,800
65 and older equals an additional $1850
Filing threshold – self-employment
Any earnings from self-employment of at least $400 NET (income minus expenses) you must file a return
Filing threshold – church employee
Church employee income of $108.28 or more you must file a return
Kiddie Tax
Determines if a child or dependent needs to file a tax return
The first $1250 of unearned income is not taxed
The second $1250 is taxed at the child’s rate
Anything above $2500 is then taxed at the parents rate
When are dependence required to file a tax return?
Earned income – the threshold is the same as single. $13,850.
Unearned income – anything greater than $1250 requires the child to file a return
Schedule C
Taxpayers report their business income on schedule C, profit or loss from business.
For reporting income and expenses related to the business
Schedule F
Specifically for reporting profit or loss from farming or fishing
Form 1099 – NEC
This form is used to report payments to an independent contractor who is paid at least $600 during the year
Form 1099 - MISC
This form is used to report other types of payments such as rents royalties, prizes, and awards
Why should you file a tax return if you were not legally obligated?
You could still be eligible for a tax refund or qualify for any refundable tax credits, such as the earned income tax credit
Additional filing requirements that require you to file a tax return
- Taxpayer owes Social Security tax or Medicare tax on unreported tips
- Taxpayer must pay the alternative minimum tax.
- Taxpayer owes additional tax for retirement plan such as IRA 401(k) or 403B
- Taxpayer received a distribution from a Medicare advantage and essay, archer, MSA, or health savings account HSA.
- Taxpayer owes household employee taxes… Can File schedule H by itself
- Must recapture an education, credit, investment credit, or other credit
- Taxpayer received advanced payments of the premium tax credit. Should receive forms 1095 – a
Relief from joint tax liability
Filing a joint return, both are legally responsible for the entire tax liability
A taxpayer can file a claim for spousal relief under three different grounds
- Innocent spouse relief.
- Separation of liability relief.
- Equitable relief.
Form 8857, request for innocent spouse relief, is used to request all three types of relief
Innocent spouse relief
A taxpayer can seek innocent spouse relief from the IRS if they later become aware of a tax liability in the believe that it is not theirs and can prove they did not know about it.
File form 8857, request for innocent spouse relief
Separation of liability relief
Taxpayer must either no longer be married or legally separated from their spouse, be widowed, or have lived apart for at least a year from the spouse with whom they filed a joint return.
Cannot have had knowledge of the tax item leading to the deficiency signed under duress
File form 8857 to request separation of liability relief
Equitable relief
Taxpayer doesn’t qualify for innocent spouse, relief, or separation of liability relief.
IRS will review the fax and circumstances to see if it would be unfair to hold the taxpayer liable.
Spousal abuse is an example
Injured spouse claim
Taxpayers spouse has passed financial obligations with the IRS that a refund would be applied to
Injured spouses file form 8379, injured spouse, allocation, to request their portion of the refund on a joint return
To be considered an injured spouse, must meet the following
- Have filed a joint return
- Have paid federal income tax, or claimed a refundable tax credit.
- Or part of the refund was or is expected to be applied to the spouses past obligation
- Not be responsible for the debt.
RSED
Refund statute expiration date
If you find an error on a previously filed return and want to refund, the amended return must be filed within three years of the date the return was filed.
Or two years from the date, the tax was paid whichever is later
If you file your tax returns late, for example, you file five years of returns, you can only get a refund on the returns within a three-year period
Extended statute for filing late and claiming refunds
In some cases, I filed tax return, and claiming a tax refund beyond the deadline will be honored
Fire, casualty, natural disaster, or other disturbances
Financial disability, death, serious illness, incapacitation, or unavoidable absence of the taxpayer
Extended statute for a bad debt from worthless securities
Up to seven years prior
Extended statute for a payment or accrual of foreign tax
Up to 10 years prior
Statute of limitations for IRS assessment and collection
The IRS is required to assess tax within three years after the return is filed or the due date of the return.
Unless the IRS can proof fraud or a substantial understatement of gross income
Substantial understatement of gross income
Gross income is understated by more than 25%
The IRS has six years to assess tax on the return
Fraudulent tax return
There is no statute of limitations for an additional assessment of tax on a fraudulent tax return or if a taxpayer never files a return
CSED
Collection statute expiration date
The IRS can attempt to collect unpaid taxes for up to 10 years from the date the taxes are assessed
The bill date is the assessment date not the date it is filed
