Chapter 2A Lecture Notes: Locating Tax Laws and Tax Planning
Locating Federal and California Tax Laws
This chapter is not required for the California Tax Education Council (CTEC) course or exam, but it provides valuable information on locating federal and California income tax laws.
Knowing where to find these laws is essential for tax research and tax planning.
The Importance of Tax Planning
Clients pay tax professionals not just for completing tax returns but also for tax planning.
Tax planning involves choosing courses of action that minimize taxes.
Example: The professors helped his in-laws on a financial decision that saved them approximately in income tax.
Finding the Internal Revenue Code (IRC)
The Internal Revenue Code is the tax law.
A reliable online source is law.cornell.edu.
The IRC is located in Title 26.
There are numerous sections in the IRC (e.g., 9,834 sections).
The IRC is distinct from regulations, which are even more extensive.
Section 61 of Title 26 defines gross income.
Gross income means all income from whatever source derived, unless otherwise provided.
Understanding Tax Law
Tax law itself is relatively concise, which leads to extensive regulations and court cases to interpret what constitutes income.
Example: Frequent flyer points were deemed income by the IRS, and this was supported by a court case. However, the IRS decided not to enforce this.
Income doesn't have to be in cash; it can be in other forms.
Using IRS.gov
IRS.gov is the official website for finding forms and publications.
You can search for forms and instructions (e.g., Form 1040).
Publication 17 is a valuable resource for individual taxpayers (143 pages).
Publication 527 provides information on residential rental properties (37 pages).
IRS publications cover income, expenses, and depreciation.
California Tax Laws (FTB.ca.gov)
FTB.ca.gov is the website for California tax laws.
Form 540 is the main California income tax form.
The form booklet includes both the form and instructions (80 pages).
Both the IRS and the Franchise Tax Board (FTB) provide instructions with their forms.
California Revenue and Taxation Code
The California Revenue and Taxation Code can be found online.
Personal income tax information starts in Section 17001.
The Franchise Tax Board (FTB) administers these laws.
How Income Tax Law is Created
The House of Representatives and the Senate must both pass a bill.
The bill is then sent to the President for approval.
If the President signs it, it becomes part of the Internal Revenue Code.
Major tax law changes were last made in 1986, but changes occur frequently.
The Constitution allows for these changes.
The structure of the law: section, subsection, etc.
Interpretation and Administration of Tax Law
The Internal Revenue Code defines income broadly, meaning everything is included unless specifically excluded.
After Congress passes the law, the U.S. Treasury and IRS issue administrative revenue rulings and regulations to interpret the law.
Resolving Tax Disputes
If a taxpayer disagrees with an IRS audit, they can appeal.
The appeal can go to IRS appeals, then to tax court, U.S. district court, or court of federal claims.
Taxpayers must hire a lawyer, which costs money.
Decisions from tax court can be appealed to the court of appeals.
The Supreme Court can hear appeals from the court of appeals but takes very few cases.
Tax Research Process
Identify the problem.
Conduct tax research.
Use the law, administrative sources, and other relevant information.
Refine the problem.
Develop a solution.
Communicate the solution to the client.
Example: Researching depreciation deductions for a new vehicle to advise a client.
Tax Avoidance vs. Tax Evasion
Tax avoidance is legal tax minimization.
Tax evasion is illegal.
Businesses can often eliminate much of their profit through deductible expenses.
Strategies for Minimizing Taxes
Eliminate tax.
Defer receipt of income to a year with a lower tax rate.
Capital gains are taxed at a lower rate than ordinary income.
Capital gains apply to assets held for more than a year, such as stocks, bonds, rental homes, and personal residences.
Ethical Considerations
Do not cheat or lie, as this can lead to legal consequences.
There is a lower chance of getting caught due to fewer IRS auditors.
The IRS is planning to lay off a third of its employees.
CPA Exam Recommendation
Tax law is part of the CPA exam.
Becoming a CPA can open many career opportunities.
CPA job offerings often have higher salaries.
CPA Exam Preparation
Take a review course to prepare for the CPA exam.
The CPA exam has four sections.
When the lecturer took the exam, it had five sections and lasted 20 hours over two and a half days.
The exam was administered using paper and pencils in an auditorium.
The exam was only offered twice a year.
The CPA exam is easier today.