EXAM 1 - Individual Income Taxation ACC 417

What is a tax?

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

What are the three key components of a tax?

• Payment is required.

• Payment is imposed by a government agency (federal, state, or local).

• Payment is not tied directly to a benefit received by the taxpayer.

Is a payment for a driver's license a tax?

No

Is a required payment for a government-required house appraisal a tax?

No

Is a 1% charge on a hotel bill used to pay for city projects a tax?

Yes

Is a 3% charge on a rental car bill used to pay for roads a tax?

Yes

What two things must you know to calculate a tax?

The tax rate and tax base.

What is a tax rate?

The level of taxes imposed on the tax base, usually expressed as a percentage.

What is a tax base?

What is actually taxed, usually expressed in monetary terms.

Basic tax calculation

Tax Base × Tax Rate = Tax

What is the marginal tax rate?

The tax rate that applies to the next additional increment of a taxpayer's taxable income.

What is the average tax rate?

The taxpayer's average level of taxation on each dollar of taxable income.

How do you calculate the average tax rate?

Tax Due ÷ Taxable Income

What is the effective tax rate?

The taxpayer's average rate of taxation on each dollar of total income, including taxable and nontaxable income.

How do you calculate the effective tax rate?

Tax Due ÷ Total Income

What is the main difference between average and effective tax rates?

Average tax rate uses taxable income, while effective tax rate uses total income (taxable + nontaxable).

How do you calculate the marginal tax rate?

Change in Tax ÷ Change in Taxable Income

What is a proportional tax rate (flat tax)?

A tax structure that imposes a constant tax rate throughout the tax base.

What is a progressive tax rate?

A tax structure that imposes an increasing marginal tax rate as the tax base increases.

What is a regressive tax rate?

A tax structure that imposes a decreasing marginal tax rate as the tax base increases.

What happens to the tax rate as the tax base increases under a proportional tax?

The tax rate stays the same.

What happens to the marginal tax rate as the tax base increases under a progressive tax?

The marginal tax rate increases.

What happens to the marginal tax rate as the tax base increases under a regressive tax?

The marginal tax rate decreases.

What are the major types of federal taxes?

Income taxes, employment and unemployment taxes, excise taxes, and transfer taxes.

What are the major types of state and local taxes?

Income taxes, sales and use taxes, property taxes, and excise taxes.

What are federal income taxes levied on?

Individuals, corporations, estates, and trusts.

What are the two major employment taxes?

OASDI (Social Security tax) and MHI (Medicare tax).

What are unemployment taxes used for?

To fund temporary unemployment benefits for individuals terminated from their jobs without cause.

What is an excise tax?

An indirect tax imposed on specific goods, services, and activities, rather than on broad retail sales.

What are estate and gift taxes?

Taxes levied on the fair market value of wealth transfers upon death or by gift.

What is the tax base for a sales tax?

Retail sales of goods and some services.

What is the tax base for a use tax?

The retail price of goods owned, possessed, or consumed within a state that were not purchased within that state.

What is an ad valorem tax?

A tax where the tax base is the fair market value of the property.

What are real property taxes imposed on?

Land and structures permanently attached to land.

What are personal property taxes imposed on?

Other types of property, both tangible and intangible.

• usually business, for example: equipment, furniture machinery

• What is used to generate profit

What is an implicit tax?

An indirect tax resulting from a tax advantage the government grants to certain transactions.

How is an implicit tax defined in terms of investment returns?

The reduced before-tax return that a tax-favored asset produces because of its tax-advantaged status.

What are the five criteria used to evaluate alternative tax systems?

Sufficiency, Equity, Certainty, Convenience, and Economy.

What is sufficiency?

Assessing the aggregate amount of tax revenue that must be generated and making sure the tax system provides those revenues.

What is equity?

How the tax burden should be distributed across taxpayers.

What is certainty?

Taxpayers should be able to determine when to pay, where to pay, and how to determine the tax.

What is convenience?

The tax system should be designed so taxes can be collected without undue hardship to the taxpayer.

What is economy?

The tax system should minimize compliance and administration costs.

What is static forecasting?

Forecasting that ignores how taxpayers might change their activities in response to a tax law change and instead bases projected revenues on the existing state of transactions.

What is dynamic forecasting?

Forecasting that tries to predict taxpayers' possible responses to new tax laws.

What is the income effect?

As tax rates increase, people will work harder to maintain the same after-tax income.

What is the substitution effect?

As tax rates increase, people will substitute nontaxable activities because the marginal value of taxable activities has decreased.

What does ability to pay mean when evaluating equity?

A tax system is generally considered fair or equitable if the tax is based on the taxpayer's ability to pay.

What is horizontal equity?

Two taxpayers in similar situations pay the same tax.

What is vertical equity?

Taxpayers with a greater ability to pay pay more tax relative to taxpayers with a lesser ability to pay.

What determines whether an individual must file a tax return?

The taxpayer’s filing status, age, and gross income.

What are the filing requirements for corporations?

All corporations must file regardless of taxable income.

When are estates and trusts required to file?

When gross income exceeds $600.

What is the 2026 filing threshold for a single taxpayer under age 65?

$16,100

What is the 2026 filing threshold for a single taxpayer age 65 or older?

$18,150

What is the 2026 filing threshold for married filing jointly when both spouses are under 65?

$32,200

What is the 2026 filing threshold for married filing separately?

$16,100

What is the 2026 filing threshold for head of household under age 65?

$24,150

What is the 2026 filing threshold for a qualifying surviving spouse under age 65?

$32,200

When is an individual's tax return generally due?

The 15th day of the 4th month following the end of the tax year.

When is a C corporation's tax return generally due?

The 15th day of the 4th month following the end of the tax year.

When are partnership and S corporation returns generally due?

The 15th day of the 3rd month following the end of the tax year.

What happens if a tax return due date falls on a Saturday, Sunday, or holiday?

The due date is extended to the next business day.

Who can apply for automatic filing extensions?

Individuals, corporations, and partnerships.

What is the statute of limitations?

The time in which a taxpayer can file an amended return or the IRS can assess a tax deficiency.

What is the general statute of limitations for a tax return?

3 years from the later of:

1. The date the tax return was actually filed, OR

2. The tax return's original due date.

• Which ever is the latest

How do you determine when the statute of limitations ends?

Determine the later of the actual filing date or original due date, then add 3 years.

Why is a tax return generally selected for an IRS audit?

Because the IRS believes the return has a high probability of being incorrect.

What is the DIF system?

The Discriminant Function system, a scoring system used to identify tax returns that may have an understated liability.

What is the document perfection program?

An IRS program that checks returns for math errors and similar mistakes.

What do information matching programs do?

Compare information reported on a tax return with other information available to the IRS.

What are the three types of IRS audits?

Correspondence, office, and field examinations.

What is a correspondence examination?

The most common audit; conducted by mail and generally limited to one or two items.

What is an office examination?

The second most common audit; conducted at a local IRS office and tends to be broader in scope.

What is a field examination?

The least common audit; conducted at the taxpayer's place of business and can last months to years.

What happens if a taxpayer agrees with the IRS's proposed adjustment after an examination?

The taxpayer pays the taxes due.

What happens if a taxpayer disagrees with the IRS's proposed adjustment?

The IRS issues a 30-Day Letter, and the taxpayer may request an appeals conference.

What happens if the taxpayer does not respond to the 30-Day Letter?

The taxpayer receives a 90-Day Letter.

What can a taxpayer do after receiving a 90-Day Letter without paying the tax first?

Petition the U.S. Tax Court.

What can a taxpayer do if they pay the tax after receiving a 90-Day Letter?

File a claim for refund with the IRS.

What happens if the IRS denies the taxpayer's refund claim?

The taxpayer may file suit in U.S. District Court or U.S. Court of Federal Claims.

What are the characteristics of U.S. Tax Court?

National court; judges are tax experts; taxpayer does not have to pay the tax first.

What are the characteristics of U.S. District Court?

Local court; possible jury trial; judges are generalists; taxpayer must pay the tax first.

What are the characteristics of the U.S. Court of Federal Claims?

National court; judges are generalists; taxpayer must pay the tax first.

What are the three categories of primary tax authorities?

Statutory, administrative, and judicial.

What are statutory tax authorities?

Tax law originating from legislative sources, such as the Internal Revenue Code.

What are administrative tax authorities?

IRS/Treasury pronouncements, including regulations, revenue rulings, revenue procedures, and letter rulings.

What are judicial tax authorities?

Tax law arising from court decisions.

What is the main statutory authority for federal taxation?

The Internal Revenue Code (IRC).

Who enacts changes to the Internal Revenue Code?

Congress

What is the highest judicial authority?

The U.S. Supreme Court.

What is the next level of judicial authority below the Supreme Court?

The U.S. Courts of Appeals.

What are the three trial-level federal courts for tax cases?

U.S. District Courts, U.S. Court of Federal Claims, and U.S. Tax Court.

What is stare decisis?

The doctrine that a court will rule consistently with its previous rulings and rulings of higher courts with appellate jurisdiction.

What is the Golsen rule?

The rule applied by the Tax Court concerning precedent from the applicable Court of Appeals.

What are Treasury Regulations?

The Treasury Department's official interpretation of the Internal Revenue Code.

What are the three forms of Treasury Regulations?

Final, temporary, and proposed.

What are Revenue Rulings?

Administrative authorities with less authoritative weight that provide a more detailed interpretation of the Code, such as applying the law to a specific factual situation.

What are Revenue Procedures?

Authorities that explain in detail IRS practices and procedures for administering tax law

What are Letter Rulings?

Less authoritative but more specific guidance applied to a specific taxpayer.