Taxation Topic 1

Tax

It is a payment imposed by the government. It helps fund the government and society as a whole.

16th Amendment

Gave congress the ability to tax income.

Basic Tax Calculation

Tax Rate x Amount being taxed

Progressive Tax Structure

As income increases, the marginal tax rate increases.

Marginal Tax Rate

The tax rate applied to your dollar/chunk of taxable income.

Regressive Tax Structure

As income increases, the tax burden/tax rate decreases.

Proportional Tax Structure

Every dollar is taxed at the same rate (also referred to as flat tax rate).

Evaluating weather a tax system is Good

SECCE

Sufficiency

Does the government collect enough money to pay its expenses?

Equity

Is the tax system fair?

Horizontal Equity

People in similar/equal situation should generally pay similar amounts of tax.

Vertical Equity

People with greater ability to pay should pay more.

Certaintity

Knowing what you owe

Convience

Ask is it easy to pay?

Economy

Keep the cost of the tax system low.

Individual Tax Return Due Date

The return is generally due: 15th day of the 4- month after the year end.

Filing Extension

6 month extension for filing paperwork.

Pay-as-you- go Tax System

Means paying your taxes as you earn income, rather than waiting until the end of the year.

Quarterly Estimated Tax Payments

Self-employed

Payroll Taxes

Social Security and Medicare

Social Security

6.2% for employee to pay and 6.2% for employer to pay.

Medicare

Employer pays 1.45% and employee pays 1.45%.

Self-Employed Tax rate for Social Security and Medicare

You pay for both sides.

Statue of Limitations

Amount of time government has to go after you for an incorrect tax return.

3- Years General Rule

The government has 3 years to assess additional tax.

6- Year Situation

More than 25% underreported if you underreported your gross income. By more than 25%.

Indefinite Situation

This statue means doesn’t expire if you even file a return at all. REMEMBER fraud or no return = forever

IRS Audits

• Correspondence Examination

• Office Examination

• Field Examination

Correspondence Audit

IRS communicates with you by mail. Usually limited to one or two items.

Office Examination

IRS wants you to come into a IRS office.

Field Examinatino

The IRS goes to a business and examines the books & records.

30 Day Letter

You receive this if IRS believe you owe additional tax amounts.

30 Day letter Response Options

1. Request a conference with a appeal officer.

2. Agree & pay

90 Day Letter

If a matter is not resolved IRS send this and its also known as statutory notice of defincey. It is a formal notice that comes in the mail certified.

90 Day letter Response Options

1. Agree to pay

2. Petition the appropriate court

Tax Courts

• U.S. Tax Court

• U.S. District Court

• U.S. Court of Federal Claims

U.S. Tax Court

You don’t have to pay the disputed tax first before going to court.

U.S. District Court/ Court of Federal Claims

Generally, one must pay the tax, request a refund, refund claim has to be denied, and then pursue the case (appeal).

Appeals

If you lose in a trial court you have the right to appeal to a higher court (U.S. Supreme Court or 13 Circuit Courts)

Sources of Tax Law: Highest Authority

U.S. Constitution

Sources of Tax Law: Legislative Authority

Congress creates tax laws (Internal Revenue Code)

Sources of Tax Law: Admin Authority

Treasury Regulations (they generally interpret & explain the tax law).

Sources of Tax Law: Judicial Authority

The courts interpret tax law through court decisions. The Supreme Court is the ultimate judicial authority.

Primary Authority

If you are arguing in court you would use this to rely on.

Secondary Authority

Unofficial material that helps explain tax law, used to understand the issue then find the underlying primary authority.

Private Letter Ruling

When a taxpayer asks the IRS: If I do this how will you tax me?

Technical Advice Memorandum (TAM)

When an IRS agent/Auditor needs guidance about how to handle a particular tax issue.

Tax Research

This is the process as follows:

Facts ——> Issue——> authority —→ analyze—> document

Open Facts

Something that hasn’t happened yet, you can use tax research to help determine the best course of action before you act.

Closed Facts

The transaction/event has already happened.

Tax Professional Responsibilities

They are subject to professional standards and ethical rules by the ACPA.

Circular 230

A rule established by the IRS for tax professionals to practice before the IRS themselves.

Tax Penalties

Civil and Criminal

Civil Penalties

Involve money, you did something wrong —→ government imposes financial penalty.

Criminal Penalties

Involves prison. An example is tax evading; willingly trying to defraud.

Failure to Pay Penalty

Penalty: 0.5% of tax due per month

Failure to File Penalty

5% of tax due per month.

Fraud Penalty

Penalty: 75% of the liability attributed to the fraud.

Business Entites

• Sole proprietorship

• Partnership

• C Corp

• S Corp

• LLC

Flow Through Entity

Generally the companies income isn’t taxed at the entity level the same way as C-corp. Instead owners pay tax on their individual returns. EX: partnerships, S corp, LLC when they elect the applicable flow through treatment.

Non- Flow Through Entity

The corporation is treated as a separate tax payer and any shareholder dividends are taxed as well to the specific shareholder. DOUBLED TAX.