Exam 1 Review
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This 7 page Study Guide was uploaded by Victoria Andreski on Sunday January 24, 2016. The Study Guide belongs to ACCT 404 at Clemson University taught by Sarah Martin in Spring 2016. Since its upload, it has received 103 views. For similar materials see Individual Taxation in Accounting at Clemson University.
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Date Created: 01/24/16
Exam 1 Study Guide Chapter 1 How do taxes in uence the basic business investment and political decisions 0 Business I Owners amp managers must consider all costs amp bene ts to evaluate advantages of transactions I Return on investments can increase by up to 13 by tax effects on transaction I Helps businesses determine Where to locate Which organizational form to use Acquisition structure Appropriate mix of debt amp equity Rent or own equipment amp property Distribution of pro ts to owners 0 Individual I Owning a home tax deductions for home mortgage interestreal estate taxes can reduce aftertax costs of owning a house rather than renting one I Retirement Taxadvantaged method of saving for retirement Increase aftertax value of retirement amp increase chance of affording to retire I Choosing investments I Evaluating other job offers I Saving for educational expenses college tuition I Giftestate planning 0 Political I Differentiate themselves from opponents by tax rhetoric I Voters need basic tax knowledge to evaluate merits of other tax proposals I Consider questions like What will be taxed Who will be taxed How much is taxed Taxes vs FinesFees o Tax required payment by government agency I Unrelated to any speci c bene t service received from agency I Components Payment required Payment imposed by government agency federal state local Payment not directly tied to bene t received by taxpayer I Purpose fund operations of government raise revenue I Examples Gas tax Local school taxes Vehicle registration taxes 0 FinesFees I Intended to punish or prevent illegal behavior I Examples Drivers license Building permit Fishing license Earmarked Tax tax charged for a speci c purpose 0 Taxpayer s payment does not directly relate to speci c bene t received by taxpayer 0 Example 1 sales tax for special options roads schools etc Sin Levy levy surcharges on otherwise illegal behavior 0 Examples alcohol amp tobacco Calculating Taxes 0 Need to know tax rate amp tax base I Tax Rate level of taxes levied on tax base I Tax Base what is actually taxed monetary terms 0 Tax Tax Base X Tax Rate Tax Structures 0 Proportional Tax Rate Flat Tax constant rate no matter how much you buy I Tax base increases proportionately with taxes paid I Ex Sales tax I Marginal tax rate average tax rate 0 Progressive Tax Rate increasing marginal tax rate as tax rate increases I Higher the taxable income the higher the tax rate I Average tax rate always S marginal rate I Ex federal amp state income taxes 0 Regressive Tax Rate Decreasing marginal tax rate as tax base increases I Very rare I The higher the tax base the lower the tax rate amp higher taxes paid I Ex Social Security amp Federal State Unemployment taxes Marginal Tax Rate 0 Tax that applies to next additional increment of taxpayer s taxable income 0 Marginal Tax Rate Change in Tax Change in Taxable Income Average Tax Rate 0 How much of each dollar of taxable income is used to pay taxes 0 Average Tax Rate Total Tax Taxable Income Effective Tax Rate 0 Total tax paid as a ratio of taxable amp nontaxable income earned 0 Effective Tax Rate Total Tax Total Income 0 Most useful better picture of a taxpayer s tax burden Federal Taxes 0 Income taxes largest tax I Imposed on individuals corporations estates amp trusts 0 Employment amp Unemployment taxes I 2nd largest tax I Unemployment taxes fund temporary unemployment bene ts for people terminated from jobs without cause 0 Excise taxes 3rd largest tax I Levied on quantity NOT monetary amount 0 Estate amp Gift taxes Transfer taxes levied on FMV of wealth transfers upon death or by gift State amp Local Taxes 0 Sales amp Use taxes I Tax base for sales tax is retail sale of goodsservices I Tax base for use tax is retail price of goods owned possessed or consumed within a state that were NOT purchased within the state 0 Property taxes ad valorem taxes have value I Tax base is FMV of property I Real property taxes taxes on land amp structures permanently attached to land I Personal property taxes taxes on all other types of property Tangible amp intangible 0 Income taxes 0 Excise taxes Implicit Taxes indirect taxes resulting from a tax advantage from government 0 Reduced beforetax return that a taxfavored asset produces bc of its tax advantaged status 0 Challenging to quantify Evaluate Alternative Tax Systems 0 Sufficiency does tax generate enough tax revenue to support functions of the government 0 Equity faimess of tax I Tax based on ability to pay I Horizontal 2 taxpayers in similar situations pay same tax I Vertical taxpayers w greater ability to pay tax pays more tax in comparison to taxpayers w lesser ability to pay tax 0 Certainty taxpayers should have ability to determine when to pay tax where to pay tax amp how to determine tax 0 Convenience tie collection of tax as closely as possible to the transaction that generates it o Economy minimize compliance amp administrative costs associated w tax system Chapter 2 Filing requirements for income tax returns 0 Corporations ALL must le regardless of taxable income 0 Estates amp Trusts required to le if gross income exceeds 600 0 Individuals ling determined by taxpayer s ling status age amp gross income Due dates of income tax returns 0 Individuals 15th day of 4th month following end of tax year I Typically April 15 o Corporations 15th day of 3rd month following end of tax year I Typically March 15 Statute of Limitations time in which taxpayer can le an amended return or IRS can charge a tax de ciency o Ends 3 years from later of I Date tax return was actually le I Tax retum s original due date 0 Extended dates I 6year if taxpayer omits items of gross income exceeding 25 of gross income reported on tax return I If taxpayer fails to le tax return or les a fraudulent return statute of limitations is open inde nitely IRS Audit Selection 0 Selected bc IRS believes tax return has high probability of being incorrect o Discriminant Function DIF system I Scoring system assigns a score to certain return characteristics 0 Document perfection I Checks for math errors 0 Information matching programs I Compares tax return data w other IRS information Types of IRS Audits 0 Correspondence Examinations I Not common I Conducted by mail generally limited to 12 items on return 0 Of ce Examinations I 2nd most common I Conducted in local IRS of ce broader in scope 0 Field Examinations I Least common I Held at taxpayer s place of business can last months to years I Typically for big corporations or high networth individuals I Broad in spectrum look at a lot 30day letter 0 Provides taxpayer opportunity to pay proposed adjustment or request conference w appeals of cer 90day letter o Taxpayer has 90 days to either pay proposed de ciency or le petition in US Tax Court Trial Level Courts 0 Tax Court National court Tax experts only hear tax cases Do NOT pay tax lSt Has a small claims court 50000 or less 0 US District Court Local court Possible jury trial Generalists not very technical in tax law Pay tax lSt pay amp then get a refund If you don t have money to travel far Facts aren t strong technically but jury might feel sorry for you 0 US Court of Federal Claims National court Generalists Pay tax lSt Appeals made to US Circuit Court of Appeals for Federal Circuit in Washington DC Appellate Courts 0 US Tax Court amp US District Court cases are appealed to the speci c US Circuit Courts of Appeals based on taxpayer s residence 0 US Court of Federal Claims is appealed to US Circuit Court of Appeals for Federal Circuit in Washington DC 0 All appellate courts appeal to US Supreme Court however Supreme Court rarely hears tax cases writ of certiorari Primary Authorities 0 Of cial sources of tax law Statutory sources Judicial sources Administrative sources 1 Revenue Rulings provide detailed interpretation of code 2 Revenue Procedures explain in great detail IRS practice amp procedures in administering tax law 3 Letter Rulings published everyone cab view it o Requested by taxpayer on a speci c set of facts Secondary Authorities o Unof cial tax authorities Can rely on Will put it in readable terms helps interpret Tax services Tax articles Stare decisis a court will rule consistently with its previous rulings of higher courts with appellate jurisdiction Legislative Process of Tax Law 0 Tax law begins in House of Representatives Ways amp Means Committee 0 In the Senate Senate Finance Committee considers tax acts before voting by the entire Senate 0 If differences between 2 versions the Joint Conference Committee irons out differences or the bill dies Sources of tax practitioners professional responsibilities 0 AICPA Code of Professional Conduct 0 AICPA Statement on Standards for Tax Services 0 IRS Circular 230 0 State Board of Accountancy Statutes Chapter 3 3 strategies for tax planning 0 l Timing when income is taxed or an expense is deducted affects the associated real tax costs or savings for 2 reasons Time income is taxedexpense is deducted affects the present value of taxes paid on income or the tax savings on deductions Tax costs of income amp tax savings income vary as tax rates change Accelerating deductions Accelerating a current cash in ow get tax savings sooner Deferring income Deferring a current cash out ow delaying tax payment When tax rates are increasing taxpayer must calculate the optimal tax strategies for deductions amp income The higher the tax rate the higher the tax savings for a deduction The lower the tax rate the lower the tax costs for taxable income When tax rates are decreasing taxpayers should accelerate tax deductions into earlier years amp defer taxable income to later years Always accelerate deductions amp put off income 0 2 Income Shifting reveals differences in tax rates across taxpayers by shifting income from hightax rate taxpayers to lowtax rate taxpayers OR shifting deductions from lowtax rate taxpayers to hightax rate taxpayers o 3 Conversion tax rates can differ across different activities Ordinary income taxed at ordinary rates Longterm capital gains taxed at preferential rates Some income is tax exempt Tax Avoidance legal amp endorsed by the courts amp Congress 0 Legal act of arranging your transactions in order to minimize taxes paid Tax Evasion will attempt to defraud the government 0 Illegal may land taxpayer in prison Constructive Receipt Doctrine taxpayer required to recognize income when it s actuallyconstructively received 0 If all my rights are there amp I m aware it s available to me I can t pull it off 0 Occurs if I Income is unconditionally available to taxpayer I Taxpayer is aware of income s availability I No restrictions on taxpayer s control over the income Assignment of Income 0 Requires income to the taxed to taxpayer who actually earns the income I Assigning a paycheck or dividend to another taxpayer does NOT transfer tax liability 0 Fruit amp the tree metaphor I Fruit doesn t fall far from the tree RelatedParty Transactions 0 IRS examines because they are usually not armslength transactions I 2 nonrelated buyers enter into transaction Business Purpose Doctrine 0 IRS has power to disallow business expenses for transactions without a business purpose 0 Ex paying for own electric bill at my house NOT a business transaction StepTransaction Doctrine 0 IRS has power to collapse series of transactions into one in order to determine tax liability SubstanceOverForm Doctrine 0 IRS can reclassify transaction according to its substance instead of its form what it looks like I See what it s really trying to do not what it looks like it s trying to do Economic Substance Doctrine 0 Must meet 2 criteria I l Meaningfully change a taxpayer s economic position excluding any federal income tax effects I 2 Substantial purpose other than tax avoidance for transaction
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