ACC 315 Test 1

Definition of a Tax

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

Tax Calculation Formula

Tax = Tax Base × Tax Rate

Marginal Tax Rate

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

Average Tax Rate

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

Effective Tax Rate

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

Proportional Tax Rate (Flat Tax)

Imposes a constant tax rate throughout the tax base.

Progressive Tax Rate

Imposes an increasing marginal tax rate as the tax base increases.

Regressive Tax Rate

Imposes a decreasing marginal tax rate as the tax base increases.

Static Revenue Forecasting

Forecasting that ignores how taxpayers might alter activities in response to a tax law change.

Dynamic Revenue Forecasting

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

Horizontal Equity

The principle that two taxpayers in similar situations should pay the same tax.

Vertical Equity

The principle that taxpayers with greater ability to pay should pay more tax.

Implicit Taxes

Indirect taxes resulting from the reduced before-tax return that a tax-favored asset produces.

Certainty (Tax System)

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

Economy (Tax System)

A tax system should minimize compliance and administration costs.

Taxes influence personal decisions such as whether to buy or rent a house.

True

Jerry recently paid $20 in tolls for the Florida turnpike. The $20 payment is considered a tax.

False

Taxes are voluntary payments paid to a government for a specific benefit received by the specific taxpayer.

False

The federal income tax is an example of a regressive tax system.

False

The marginal tax rate is often used in tax planning.

True

Horizontal equity means that two taxpayers with different amounts of income should pay different amounts of tax but fairly in relation to their ability to pay.

False

Which of the following is considered a tax?

1% local surcharge on hotel rooms to pay for city government.

Which of the following is an example of a progressive tax system?

U.S. Federal Income Tax

Mitch, a single taxpayer, earns $110,000 in taxable income and $10,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2026, how much federal tax will he owe?

$18,998

Mitch, a single taxpayer, earns $110,000 in taxable income and $10,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2026, what is his average tax rate (rounded)?

17.27%

Mitch, a single taxpayer, earns $110,000 in taxable income and $10,000 in interest from an investment in city of Birmingham Bonds. If Mitch earned an additional $100,000, what would his 2026 marginal tax rate be on the $100,000 (rounded)?

24.66%

James invests $100,000 in a city of Athens bond that pays 8% interest. Alternatively, James could have invested the $100,000 in a bond recently issued by HighTech, Incorporated that pays 10% interest with similar risk as the city of Athens bond. Assume that James's marginal tax rate is 25%. Which bond should James should choose and why?

The city of Athens bond because it earns a higher after-tax rate of return.

The tax return filing requirements for individual taxpayers depend on the taxpayer's gross income.

True

A textbook is an example of a primary authority.

False

Private Letter Rulings have less authoritative weight than Revenue Rulings.

True

Jackie's return was selected for audit because she did not report her salary (from her Form W-2 from her employer) on her tax return. Which IRS program likely identified Jackie's oversight?

Information Matching

Which of the following is not considered a primary authority?

Tax Law Review article

Which of the following has the highest authoritative weight?

Internal Revenue Code

Statute of Limitations (Tax Returns)

Generally ends three years from the later of the date the tax return was actually filed or the original due date.

Statute of Limitations for Omission of Income

A six-year statute applies if a taxpayer omits gross income exceeding 25% of the gross income reported on the return.

Statute of Limitations for Fraud or Failure to File

The statute of limitations remains open indefinitely for fraudulent returns or years in which no return is filed.

Discriminant Function (DIF) System

An IRS scoring system used to identify tax returns with a high probability of being incorrect.

Document Perfection Program

An IRS program that checks all tax returns for mathematical and tax calculation errors.

Information Matching Programs

Programs that compare tax return data with information from employers, banks, and brokerages using forms like W-2 and 1099.

Correspondence Examinations

The most common type of IRS audit, conducted by mail and generally limited to one or two items.

Field Examinations

The least common type of IRS audit, held at the taxpayer's place of business and can last months to years.

30-Day Letter (IRS)

Notifies a taxpayer of a proposed tax adjustment and gives 30 days to request an independent appeals conference.

90-Day Letter (Statutory Notice of Deficiency)

Sent by the IRS if the taxpayer and IRS do not agree at the appeals conference or if no conference is requested.

Golsen Rule

The Tax Court follows the binding precedent of the Court of Appeals that would hear the appeal for that specific case.

Revenue Rulings

Administrative sources that provide a detailed interpretation of the Code applied to a specific factual situation.

Revenue Procedures

Administrative sources that explain in great detail IRS practice and procedures in administering tax law.

16th Amendment

Ratified in 1913, it provides Congress the ability to tax income directly from any source without apportionment across states.

Tax Veto Override

Congress may override a presidential veto of a tax act with a two-thirds positive vote in both the House and Senate.

Five Steps of Tax Research

1. Understand facts, 2. Identify issues, 3. Locate relevant authorities, 4. Analyze tax authorities, 5. Document and communicate results.

IRS Acquiescence

Issued when the IRS loses a court case, indicating it will follow the ruling in future cases without necessarily agreeing with it.

IRS Nonacquiescence

Alerts taxpayers that the IRS disagrees with an adverse court ruling and plans to continue litigating the issue.

Substantial Authority and Reasonable Basis

Taxpayers avoid underpayment penalties if there is substantial authority for the position or a reasonable basis with disclosure.

Tax Extension Rule for Payments

Extensions allow taxpayers to delay filing a return but do not extend the due date for making tax payments.

Three Parties to Every Transaction

Taxpayer, other transacting party, and the government.

Three Basic Tax Planning Strategies

Timing, income shifting, and conversion.

Two Basic Tax-Related Timing Strategies

Accelerating deductions and deferring income.

Constructive Receipt Doctrine

Taxpayer must recognize income when it is actually or constructively received.

Income-Shifting Strategies

Shifting income from high-tax-rate taxpayers to low-tax-rate taxpayers to exploit tax rate differences.

Three Main Areas for Income Shifting

Transactions between family members, owners and their businesses, and across jurisdictions.

Assignment of Income Doctrine

Requires income to be taxed to the taxpayer who actually earns the income.

Conversion Strategy

Altering the nature of income or expenses to receive more advantageous tax treatment.

Business Purpose Doctrine

IRS power to disallow business expenses for transactions lacking a business purpose.

Step-Transaction Doctrine

IRS power to collapse a series of transactions into one to determine tax liability.

Substance-Over-Form Doctrine

IRS power to reclassify a transaction according to its substance rather than its form.

Economic Substance Doctrine Criteria

Transaction must meaningfully change economic position and taxpayer must have a substantial non-tax purpose.

Tax Evasion Elements

Existence of a tax deficiency, an attempt to evade or defeat tax, and willfulness.

The goal of tax planning is to maximize after-tax wealth.

True

The timing strategy is based on the idea that the period in which income is taxed affects the tax costs of the income.

True

The present value concept becomes more important as interest rates increase.

True

The conversion strategy becomes more important as interest rates increase.

False

If tax rates will be the same next year, the taxpayer should generally accelerate deductions.

True

The income shifting strategy exploits the fact that tax rates vary across taxpayers or jurisdictions.

True

The conversion strategy exploits the fact that tax rates vary across time.

False

Which of the following strategies exploits the fact that tax rates vary by activity (e.g., income type)?

Conversion

If Jack earns an 8% after-tax rate of return, $10,000 received in three years is worth how much today (rounded)?

$7,940

A common income shifting strategy is to:

shift income from a high tax rate jurisdiction to a low tax rate jurisdiction

The assignment of income doctrine most likely limits which of the following strategies?

Income Shifting

Assume that Bin's marginal tax rate is 37%. If corporate bonds pay 10% interest, what interest rate would a municipal bond have to offer for Bin to be indifferent between the two bonds?

10% * (1-0.37) = 6.30%

If Rachel has a 37% tax rate and a 10% after-tax rate of return, a $100,000 tax deduction in one year will save how much tax in today's dollars (rounded)?

$100,000 * 0.37 * 0.909 (10%, 1 year) = $33,633

Which of the following is an example of the conversion strategy?

An employer providing tax free benefits to employees instead of salary

Which of the following items is illegal under the tax law?

Tax Evasion