Tax Exam 1

Tax

Payment required, by a government that is unrelated to any specific benefit or service received. Does not include fines, fees or penalties

Marginal Tax Rate

Tax rate that applies to the next additional increment of a taxpayer’s taxable income

Average Tax Rate

Represents a taxpayer’s average level of taxation on each dollar of taxable income

Effective Tax Rate

Represents a tax payer’s average level of taxation on each dollar of total income

MTR formula

Change in tax liablity/change in taxable income

ATR formula

Total tax liability/Taxable income

ETR formula

Total tax liability/Total income

Flat tax rate

Single tax rate

Graduated tax rate

Tax base is divided into parts

Proportional tax rate

Single tax rate

Progressive tax rate

Imposes an increasing marginal tax rate as tax base increases

Regressive tax rate

Decreasing marginal tax rate as tax base increases

Use tax

Applied to goods purchased from outside a home state

Explicit tax

Directly imposed by a government that are easily quantified

Implicit tax

Arise because of a tax advantage (corp vs muni bond)

ATROR/BTROR formula

ATROR=BTROR(1-tax rate)

Sufficiency in tax systems

A tax system most evaluate the ends it hopes to accomplish and estimates the expenses and forecasts the revenues neccesary

Static Forecasting

Estimates revenues based on existing tax payer behavior, ignoring tax payer change in activity in response to change in tax law

Dynamic Forecasting

Estimates revenue based on anticipated consumer behavior in response to change in tax law

Horizontal Equity

Tax payers with same income should pay the same amount of tax

Vertical Equity

Tax payers making more should pay more

Nexus

Tax authority having jurisdiction to impose tax. Nexus generated by citizenship, residency, or generating income

1040-NR tax set up

Will only tax U.S. income, not world wide income like typical 1040

Individual Tax Payer ID

Issued by IRS for people who need a tax payer ID but do not qualify for a SSN

Employer ID

Issued to business, used for taxes and other business functions

Centralized Authorization File Number (CAF)

Issued by IRS to tax preparers, used when submitting Power of Attorney Form

Sole Proprioetorship

1040, Schedule C
Files 4/15

Single Member LLC

1040, Schedule C

Files 4/15

Partnership

1065
Files 3/15

Multi Member LLC

1065
Files 3/15

C-Corp

1120
Files 4/15

S-Corp

1120S
Files 3/15

Not For Profit

990
Files 5/15

Form 1040

Federal income tax return filed by US citizens and resident aliens

Form 1040-SR

Simplified version of Form 1040 for seniors (larger print)

Form 1040-NR

Federal income tax return filed by non-resident aliens

Form 1040-X

Form used to amend a previously filed Form 1040

Schedule 1

Additional income and adjustments to income

Schedule 2

Additional taxes

Schedule 3

Non refundable tax credits

Schedule A

Itemized deductions

Schedule B

Interest and dividend income

Schedule C

Income and expenses from business or self employed. Goes to Schedule SE

Schedule E

Income from rental proporties, partnerships or royalties

Schedule F

Income and expenses from farming activities

Schedule SE

Self employment tax calculations

Form 4562

Depreciation and amort. of business assets. Flows to Schedule C

Form 8949

Reports individual sales and exchanges of capital assets. Flows to schedule D

Schedule D

Summarizes capital gains information, including information from Form 8949

Schedule 8812

Used to claim Child Tax Credit and other dependent credits

Form 1116

Used to calculate foreign tax credit to avoid double taxaition

Form 8939

Reports specifed foreign assets if they exceed certain value thresholds

FBAR (FINCEN Form 114)

Reports foreign bank accounts if the total value exceeds certain thresholds

Form W-2

Provided by employer to employees, this document shows total wages and taxes withheld

Form W-2G

Gambling winnings

1099-NEC

Nonemployee compensation (freelance income)

1099-MISC

Miscellaneous Income (rent, awards, royalties)

1099-DIV

Dividend income

1099-INT

Interest income

1099-B

Proceeds from stock/bond sales

1099-OID

Reports original issue discount (discount on bond treated as form of income)

1099-Consolidated

Combined 1099

1099-G

Unemployment income, tax refunds, government payments

1099-R

Distributions from retirements plans, pensions, or annuitites

1099-S

Proceeds from real estate sales

SSA-1099

Social security or social security disability benefits

1099-K

Payments received via third party processors or platforms (ebay or etsy)

1099-C

Canceled debt

1099-SA

Distributions from health savings accounts

Schedule K-1

Business or estate/trust flow through items to taxpayers

Form 1098

Mortgage interest paid, mortgage paid, mortgage insurance

Form 1098-E

Interest paid on student loans

Form 1098-T

Tuition paid and scholarships

Form I-9

Verifies identity and employee authorization

Form W-4

Employee withholding certificate

Form W-9

Provided by businesses to independent contractors to obtain taxpayer information for reporting purposes

Estate (death)

Form 706
Due 9 months after dealth, extenstion due 15 months after death

Estate or Trust

Form 1041
File 4/15, extension due 9/30

Who must file regardless of income

Corporations

When must estates and trusts file

When gross income exceeds $600

When must individuals file

Must file when income is greater than the standard deduction, but individuals should file in most situations regardless of income

Statue of Limitations

Time frame within TP can file an amended return, or the IRS can asses a tax defiency on a tax year. Formally known as the Assesement of Expiration Date (ASED)

IRS statue of limitations ends 3 years from the later of

Date return was filed OR Returns original due date

IRS stature of limitations extends to 6 years when

Gross income omitted by greater than 25%

IRS statue of limiations extends forever if

TP commits fraud or has fialed to file

Discriminant Function System (DIF)

IRS uses historic adjustment data to assign a score to return for review, the higher the more likely it gets audited

Document Perfection Program

IRS checks math on return

Information matching program

IRS matches tax documents that gets sent to both TP and IRS (w-2)

Correspondence Audit

Conducted through mail and limited in scope

Office Audit

Conducted at local IRS office and broader in scope

Field Examination Audit

Conducted at TP place of business, rarest and most complex audit type

Steps after audit

1) 30 day letter
2) If not settled, 90 day letter
3a) TP can pay, then file/sue IRS in District Court or Federal Claims Court
3b) TP does not pay, then can file in US tax court

When to go to tax court

When have strong legal/tax argument. There is no jury and the judge is a tax expert

When to go to district court

When case can pull at heart strings or doesn’t have the strongest legal argument, jury trial and judges are not tax experts

Legislative Process for Tax Laws

1) HOR Ways and Means committe drafts, HOR votes
2) Sentate Finance Committee reviews/modifies, senate votes
3) Joint Conference Committee makes final changes, sends back to HOR and Senate for vote
4) President can either sign or veto

Golsen Rule

Requires the U.S. Tax Court to follow the legal precedent of the specific federal appeals court that will review a case

Substantiation requirement

TP must keep adequate records to prove income, deductions, and credits claimed on a return

Aquiescence

IRS will not litigate issue in future

Nonacquiascence

IRS will litigate issue in the future

Tax Counseling for the Elderly (TCE)

Free tax compliance programs for senior citizens