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69 Cards in this Set

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The Internal Revenue Code of 1986:
the main source of tax law
Taxpayer Relief Act of 1997:
includes over 300 provisions and 800 changes to code of 86
The process of tax ligeslation goes from: (5)
1) House Ways and Means Committee
2) House of Representatives
3) Sentate Finance Committee
4) Senate
5) President
Treasury regulations are:
-the official interpretations of statutory tax rules
-published by the US Treasury
Revenue rulings:
-stand for the official position of the Internal Revenue Service
-Have less authority than Code and regulations
Revenue procedures:
-official positions of the IRS on matters of tax tables, inflation-indexed amounts and asset class lives
Letter rulings:
-more specific interpretations offered by the IRS
Individuals who are claimed as a dependent do not have to file a claim unless their unearned income is more than:
$750
Individuals (not claimed as dependant) will have to file a tax return:
-even if their gross income is below the required amount if they make more than $400 from self-employment
taxpayers who are involved in a tax-related dispute may always bring their claim to:
-the level of the regional appeals office of the IRS
When tax dispute cases are unresolved, the taxpayer can take it to one of three Federal courts: (3)
1) US Tax Court
2) US District Court
3) US Court of Federal Claims
When the case still remains unresolved (after using 1 of 3 Federal courts) the taxpayer can take it to:
First - US Circuit Court of Appeals

Second - US Supreme Court
US Tax Court
-taxpayer refuses to pay deficiency
-no jury trial
US District Court
-taxpayer pays deficiency
-sues for a refund
-recieves jury trial
US Court of Federal Claims
-taxpayer pays deficiency
-sues for a refund
-no jury trial
When taxpayers are late in filing their returns:
-penalized 5% of the balance of the tax due for each month return is late
-after 5 months penalty increases 0.5% each month
Govt has up to (?) years to examine a return for mistakes:
3 years
If the taxpayer has ommited an amount of gross income exceeding 25% statute of limitations goes to (?) years?
6 years
The only individuals who have the authority to represent someone else before the IRS are: (3)
1) CPAs
2) Atty's
3) Enrolled agents (passed a tax exam administered by IRS)
Discriminate Functions System (DIF):
-screens all of the returns and assigsn them a score of assessing their auditworthiness
Taxpayer Compliance Measurement Program:
-calculates the norms that will be used by DIF and helps pinpoint where taxpayers are likely cheating
A Taxpayer can file as head of household if: (4)
1) not married at end of year
2) pays more than half cost of house
3) home was main home for one or more family members
4) US citizen or resident for entire year
When a taxpayer is found to have committed civil fraud:
- penalized 15% every month return is late up to 75%
If the tax preparer understates the amount of tax:
1)How much if unintentional?
2)How much if intentional?
1) $250

2) $1000
Following sources of income may be excluded from gross income: (16)
1) gifts and inheritance
2) interest on TF bonds / MFD
3) returns of capital
4) reimbursements of biz exp
5) gain in sale of home (up to $250k)
6) some or all of soc. sec bene's
7) compensation for illness & sickness (workers comp)
8) employer-paid helath cvrg.
9) employer-paid edu asst up to $5250
10) qualified foster care pmts
11) life ins proceeds
12) payments recieved via, accidental, health & LTC policies
13) amts contrib to HSAs
14) employer provided child or dependant care coverage
15) scholarships / fellowships
16) employer-paid group life ins up to $50k
Gross income that must be included in an income tax return includes: (14)
1) wages, salaries, commisions and fees
2) taxable noncash fringe benefits
3) unreported tips
4) gains from real estate, securities, and other properties
5) rents
6) int from banks, CDs, securities, loans
7) Accrued int from zero coup bonds
8) dividends
9) alimony & seperate maintenance pmts
10) royalties
11) annuity, pension & ira dist
12) income from estate or trust (but not from gift or bequest)
13) prizes and awards
14) for some tax payers up to 85% of soc sec
Can dependants claim the regular standard deduction on their tax returns?
NO
Individuals are allowed to make the following deductions from their gross income to arrive at a figure for ADJUSTED GROSS INCOME (AGI): (12)
1) trade or biz exp
2) self-emp medical ins premiums (up to a limit)
3) moving exp for work
4) 50% of self-emp tax
5) amts forfeited to a bank for premature withdrawal of funds from savings vehichle
6) alimony and separate maint payments
7) employee expenses reimbursed by employer
8) contribs to IRAs
9) deductions in connection with property held for the production of rents or royalties
10) int on qualified edu loans
11) contributions to MSA / HSA
12) losses from the sale or exch of property
What taxes are deductible? State? Local? Federal?
State and local may be. Federal is not
Real estate taxes:
-deductible even in cases where they are paid to a foreign country
-deductible for all properties owned by the taxpayer (mortgage deduction limited to two homes)
Personal Property taxes deductibility:
-deductible if based on the value of the property
What is found on Schedule A
Itemized deductions
Deductions subject to 2% limit: (2)
1) unreimbursed employee expenses
2) tax preparation fees
Deductions not subject to 2% limit: (4)
1) amoritizable premium on taxable bonds
2) federal estate tax on inc respect to a decedent
3) gambling losses
4) unrecovered losses in annuity
Non-deductible expenses include:
1) brokers commissions
2) hobby losses
3) home repairs
4) lobbying expenses
5) capital expenses
6) insurance & rents
Mortgage int on primary & secondary home for aquisition debt is limited to:
First million dollars on qualified debt
Mortgage int on home equity loan debt is limited to:
first $100,000 for first & second homes combined
Steps for calculating tax liability:
1) Determine total Gross Inc
2) Subtract deductions from GI to find AGI
3) Deduct greater of itemized deductions or standard deduction
4) Determine how many personal exepmtions can be claimed and subtract from total
5) Find tax amount from tables
6) Subtract out tax credits if any
Earned income tax credit:
-may be claimed if the individual has not earned a certain amount in the taxable year
-percentage of earned income that quilifies for the tax credit depends on the number of children taxpayer has
Adoption credit avaliable for:
taxpayer who has adopted a child that is either younger than 18 or unable to care for themself
Foreign tax credit:
-allowed so that individuals do not have to pay double tax (foreign & domestic)
-taxpayers can treat the amount of tax paid as either a deduction from income or as a refundable tax credit
Difference between tax credits and deductions:
Credits: one-for-one reductions

Deductions: limit the amount of income subject to tax
Cash method of tax accounting:
-taxpayer recognizes income when it is received
-regonize all expenses when paid
-expenses paid in advance are deducted when they apply
-method most often used by service business with little or no inventory
Accrual method of accounting:
-An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur.
-The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received).
-Method used by most business (carry inventory)
Kiddie Tax
A tax on children under 14 years old who earn income over $1,700. The extra income is taxed at the guardian's rate.
Rules for imputed interest were created to:
-to keep taxpayers from transferring income from high to low tax brackets
-or from shifting interest income to capital gains income by raising purchase price and charging less interest
If businesses what to change their accounting method:
They must obtain permission from the IRS
Long-term contracts:
-for the building, installation, construction or manufacture of buildings or products that are not completed in the year which they begin
Installment sales:
-occur when payemts are recieved in a year other than the year of the sale.
-payments include interest, gain on the sale, and recovery of the basis
-minimum interest required by IRS
Installment sales offer the advantages of: (3)
1) deferring tax
2) making property easier to sell
3) notes that carry higher interest rates than a bank
Constructive dividend:
-distribution made by a corporation to shareholders that the corporation calls salary, interest or rent, but that the IRS calls a dividend
What type of entity is often used as a tax-shelter?
-Closely held business
-offer lower tax rates
-undistributed accumulation of earnings can avoid double taxation
What is the only organization that pays tax on an entity level?
-Corporation
-report taxable income on form 1120
-not subject to passive activity loss
Who has the more favorable tax rates? individuals or corporations?
-Corporations
Taxation of dividends by corp recieved from another corp
-if corp recieved dividend from other corp it is entitled to deduction
How are net operating losses calculated by corporations:
-can be carried back 2 years
-carried forward for as many as 20 years
How are capital gains / losses taxed at corporate tax level?
-taxed at same rate as ordinary income
-not subject to reduced cap gain rate
-Net capital losses can be carried back 3 years and forward 5 years to offset capital gains (cannot used to offset income)
In a parternership basis will be increased by:
-ordinary biz income
-capital gains
-dividend income
In a partership basis will be decreased by:
-ordinary biz loss
-capital loss
-business distributions
When partners are given taxable income but no cash distribution:
-from that income, they are essentially making a larger investment in the partnership any future cash distribution can be considered as a return on investment
In an S Corporation, the basis of a shareholder will increase / decrease by:
-his share of the orporations income and gain (inc) or losses (decrease)
In an S Corporation cash distributions are considered:
-as a nontaxable return of investment that decreases the basis
In an S Corporation losses are deductible:
-as far as the owners equity investment and debt obligation
In a partnership, a partners initial tax basis will equal:
-his or her initial investment of property plus the share of partnership dent for which the partner may ultimately be held responsable
In an S corporation the shareholders initial basis in stock equals:
-cash plus the adjusted basis of any property transferred in exchange for the stock
Both partnerships and S Corporations are not considered:
-taxable entities
-taxable income is measured at the entity level and then taxed directly to shareholders or partners
The shareholders of an S corporation will need to fill out:
-a Schedule K-1 and add it to their individual tax form
-calculation of their cash flow from the corporation will not affect their tax liability
As for using losees, partners and shareholders are allowed to:
-deduct any losses that are passed through against income from other sources.
-basis, however, cannot be reduced below zero
A personal service corporation is subject to a flat tax rate of
-flat tax rate of 35%
-limitations on passive losses