Federal Taxes on Income Test 1

What is a tax?

A payment required by a government unrelated to any specific benefit or service received from the government.

What is the purpose of a tax?

To fund the operations (raise revenue) of the government.

How are taxes different from fines and penalties?

They are not intended to punish or prevent illegal behavior.

What is a sin tax?

Taxes imposed on the purchase of goods that are considered socially less desirable

What are the three criterias for a tax?

Required, imposed by a government agency, and not tied directly to the benefit received by the taxpayer

What is an earmarked tax?

A tax that is assessed for a specific purpose

What is the tax equation?

Tax = Tax Base X Tax Rate

What is a tax base?

The item that is being taxed

What is the tax rate?

The level of taxes imposed on the tax base

What is a flat tax?

A single tax applied to an entire base

What is a graduated tax?

Taxes in which the tax base is divided into a series of monetary amounts, or brackets, where each successive bracket is taxed at a different percentage rate

Bracket

A subset of the tax base subject to a specific tax rate.

What kind of tax structure is the income tax?

Progressive rate

What is the taxable income equation?

Gross income - deductions

What is the marginal tax rate?

The incremental tax paid on an incremental amount of additional income or deductions

What is the marginal tax rate equation?

(New Total Tax - Old Total Tax) / (New Taxable Income - Old Taxable Income)

What is the average tax rate?

A taxpayer’s average level of taxation on each dollar of taxable income.

What is the average tax rate formula?

Total Tax / Taxable Income

What is effective tax rate?

A taxpayer’s average rate of taxation on each dollar of total income (taxable and nontaxable)

What is the effective tax rate formula?

Total Tax / Total Income

What is marginal tax rate useful for?

Tax planning

What is average tax rate useful for?

Budgeting tax expense

What is effective tax rate useful for?

Comparing the relative tax burdens of taxpayers

Why is the marginal tax rate useful in planning taxes?

It represents the rate of taxation or savings that would apply to additional income (or deductions).

If there is nontaxable income will effective tax rate or marginal tax rate be higher?

Marginal tax rate

In what structure is the marginal tax rate the same as the average tax rate?

Proportional Tax Rate

What is an example of a progressive tax rate structure?

Income Tax

What is an example of a regressive tax rate structure?

Social security and unemployment taxes

In what situation is a sales tax regressive?

When we use total income

What is tax incidence?

The economic analysis of who ultimately bears the financial burden of a tax

What is a value-added tax?

A tax imposed on the producer of goods based on the value added to the goods at each stage of production

What is the most significant tax assessed by the U.S government?

Individual income tax

When was the income tax first put into use?

The Civil War

What is the second largest group of taxes imposed in the U.S?

(Un)employment taxes

What is an excise tax?

Taxes levied on the retail sale of particular products

How do excise taxes differ from sales taxes?

They depend on the quantity rather than the monetary value

What are transfer taxes?

Taxes on the transfer of wealth from one taxpayer to another

What is a use tax?

A tax imposed on the retail price of goods owned, possessed, or consumed within a state that were not purchased within the state

What is a real property tax?

A tax on the fair market value of land and structures permanently attached to the land

What is a personal property tax?

A tax on the fair market value of all types of tangible and intangible property

What is an ad-valorem tax?

Taxes based on the value of property

What are explicit taxes?

Taxes directly imposed by a government

What are implicit taxes?

indirect taxes that result from a tax advantage the government grants to certain transactions to satisfy social, economic, or other objectives.

What does it mean to be tax-favored?

When the income the asset produces is either excluded from the tax base or subject to a lower tax rate

Do municipal bonds have taxes?

No

What is sufficiency?

considers whether tax revenues generated are adequate to meet the financial needs of the government

What is certainty?

Taxpayers are able to determine, when, where, and how to calculate and pay tax.

What is the tax base for the gift tax?

The fair market value of the gift on the date the gift is given

What taxes are commonly assessed by state and/or local governments?

Property, sales, and income taxes

What are the criteria used to evaluate a good tax system?

Certainty, convenience, economy, equity, and sufficiency

What is equity?

Considers how the tax burden should be distributed across taxpayers

What is convenience?

Suggests that a tax system should be designed to facilitate the collection of tax revenue without undue hardship

What is economy?

Considers that the system should minimize compliance and administration costs

The tax base for sales tax is the ______ of goods and services provided

retail sales price

What type of authority is the U.S constitution, the Internal Revenue Code, and tax treaties?

Legislative

What committee attemps to reconcile the house and senate versions of a tax bill?

Joint conference

What is static forecasting?

The process of forecasting tax revenues based on the existing state of transactions while ignoring how taxpayers may alter their activities in response to a tax law change

What is dynamic forecasting?

The process of forecasting tax revenues that incorporates into the forecast how taxpayers may alter their activities in response to a tax law change

What is the income effect?

When taxpayers are taxed more, they will work harder to generate the same after-tax dollars

What is the substitution effect?

When taxpayers are taxed more, instead of working more, they will substitute nontaxable activities for taxable ones

What is horizontal equity?

Taxpayers in similar situations pay the same tax

What is vertical equity?

When taxpayers with a greater ability to pay tax pay more tax relative to taxpayers with a lesser ability to pay tax

What does an extension do?

It allows a taxpayer to delay filing a tax return but does not extend the due date for tax payments

What does the statue of limitations do?

It defines the period in which the taxpayer can file an amended tax return or the IRS can assess a tax deficiency for a specific tax year

When does the statue of limitations usually end?

Three years from the later of the date the tax return was actually filed or the tax return’s original due date

What is a correspondence examination?

An IRS audit conducted by mail and generally limited to one or two items on the taxpayer’s return

What is an office examination?

An IRS audit conducted at a local IRS office

What is a field examination?

An IRS audit conducted at the taxpayer’s place of business or the location where the taxpayer’s books, records, and source documents are maintained

What are the three types of examinations?

Correspondence, office, and field

What is the most common type of audit?

Correspondence

What is the least common type of audit?

Field

What does a 30-day letter do?

Instructs the taxpayer that they have 30 days to either request a conference with an appeals officer or agree to the proposed adjustment

What does a 90-day letter do?

Gives the taxpayer notice that they have 90 days to either pay the proposed deficiency or file a petition in the U.S Tax Court to hear the case

What is another name for the 90-day letter?

Statutory notice of deficiency

If the taxpayer wants to be heard in either the district court or the federal claims court what must they do?

The taxpayer must pay the deficiency first, then request a refund, and then sue the IRS for refund in the court after the IRS denies the claim

Which of the courts is the only one to give a jury trial?

The district court

Which court can the losing party take the case to after the district, federal, or tax court?

U.S Circuit Court of Appeals

Which court can the losing party take the case to after the court of appeals?

SCOTUS

What is a writ of certiorari?

A document filed to request the U.S Supreme Court to hear a case

What are primary authorities?

Official sources of the tax law generated by the legislative, judicial, and executive branches

What are secondary authorities?

Unofficial tax authorities that interpret and explain the primary authorities

What are the three/legislative tax authorities?

The U.S. constitution, the internal revenue code, and tax treaties

What is the legislative process for tax laws?

house ways and means committee proposes a bill, house of representatives approve it, bill becomes an act sent to the senate finance committee, senate finance committee amends the act and passes it, act gets sent to the senate and is modified and voted on, senate passes the act and both the house and senate versions of the legislation are sent to the joint conference committee, joint conference committee revises and aproves the act, act is sent to the house and senate for a vote and if approved the act is sent to the president. If president signs it becomes a law and is incorporated into the Internal revenue code. If the president vetoes it, Congress can override it with 2/3 majority vote in both the house and senate

What is the Internal Revenue Code divided into?

Subtitles, Chapters, Subchapters, Parts, Subparts, and Sections

What are tax treaties?

Agreements negotiated between countries that describe the tax treatment of entities subject to tax in both countries

What is stare decisis?

A doctrine that states that courts will rule consistently with its previous rulings and the previous rulings of higher courts with appellate jurisdiction

What is the Golsen Rule?

Rule that states that the U.S Tax Court will abide by the rulings of the circuit court that has appellate jurisdiction for a case

What are regulations?

The treasury department’s official interpretation of the Internal Revenue Code

What are the three forms of a regulation?

Final, temporary, and proposed regulations

What are final regulations?

Regulations that have been issued in final form

What are temporary regulations?

Regulations that are issued with a limited life

True or False: Final and Temporary regulations have the same authoritative weight?

True

What are proposed regulations?

Regulations issued in proposed form that allow the public to comment on them

True or False: Proposed regulations have the same authoritative weight as final and temporary?

False

What are the three basic purposes of regulations?

Interpretative, procedural, and legislative

What are interpretative regulations?

Regulations that interpret the Treasury’s interpretation of the code and are issued under the Treasury’s general authority to interpret the code

What are procedural regulations?

Regulations that explain Treasury Department procedures as they relate to administering the code

What are legislative regulations?

Regulations issued when Congress specifically directs the Treasury Department to create regulations to address an issue in an area of law

In what instance is the Treasury Department writing the law instead of interpreting the code?

During legislative regulations

What is the rarest type of regulation?

Legislative regulations