Tax Text Review

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Tax Text Review
2013-09-28 00:06:42
TAX 495

Ch 1
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  1. Types of Taxes
    • Income taxes, employment taxes, estate and gift taxes, exise and customs taxes
    • 1.999 trillion raised in 2011
    • US has highest rate of participation and compliance
  2. Individual Income Taxes
    Tax on income of an individual, which accounted for about 50% of the gross internal revenue collected
  3. Corporate Income Taxes
    Tax on net income of a corporation, which accounted for about 9% of the total revenue collected
  4. Estate and Gift Taxes
    Tax on the transfer of property and giving of gifts, which accounts for about 1% of the total revenue collected
  5. Excise and Customs Taxes
    • Taxes levied on transaction, not income or wealth, and accounts for about 3% of the total revenue collected
    • excise-alcohol, tobacco, and gasoline
    • Custom-taxes on goods entering the country used to protect the US industry from foreign competition
  6. State and Local Taxes
    • Taxes to generate revenue on the state and local level.
    • State revenue are from income tax and sales tax
    • Local revenue are from property tax
  7. Value-Added Tax
    A tax on products, regressive tax
  8. Direct and Indirect Taxes
    • Direct taxes are federal income tax on individuals and corporations
    • Indirect tax are those levied on producers or distributors with the taxes being passed on to consumers
  9. Flat Tax
    • A flat tax is a one tax rate system
    • individual's total income minus allowances for family size and apply one tax rate
    • corporations pay one tax rate
  10. Fair Tax
    A consumption tax that resembles the sales tax
  11. Returns and Collections
    taxes and tax collections are a big business with 234.6 million federal tax returns and supplementary docs processed in 2011 and 1.999 trillion dollars collected. Increased dramatically between 1980-2011
  12. Tax Audits and Penalties
    US tax system is a voluntary compliance system with a compliance rate of 83-85%. Tax fraud is reducing because the increasing use of technology by the IRS. Audit rate is declining as well with only certain types of taxpayers and those with higher incomes having a higher probability of being selected for audit. Many law changes to impose penalties on taxpayers for not complying with the tax laws.
  13. Tax Avoidance
    Arrange transactions and affairs in such a manner as to reduce a tax liability. Avoid the tax liability prior to the time it would have occurred according to law
  14. Tax Evasion
    Guilty of evading taxes when their is already a tax liability. All actions are complete, and in spite of the liability, the taxpayer does not report income. Intent to misrepresent the facts
  15. "Badges" of fraud
    • Understatement of Income
    • Claiming of fictitious or improper deductions
    • Accounting irregularities
    • Acts and conduct of the taxpayer
  16. Corporate Tax Avoidance
    • If the Commissioner feels that there is no principle purpose for the tax-free acquisition, "such deductions, credit, or allowance" may be disallowed.
    • The escaping of taxation is not "business"
  17. Taxpayer Assessment of Tax liability
    • Decrease potential tax liability by choosing greatest tax savings
    • Example of tax savings is investing in municipal bonds whose interest is tax free than corporate whose interest is subject to tax.
  18. Income Tax Law of 1894
    Wilson Tariff Bill of 1894
    • Bill which allowed for an income tax.
    • 2% of gains, profits, and income over $4000 on individuals and corportation
    • Supreme Court declared unconstitutional because of not being an apportionment among the states
  19. Corporation Excise Tax 1909
    • First Act to be upheld b the courts that taxed corporate profits.
    • 1% tax on net income over $5,000
    • was a tax for the privilege of doing business as a corporation
    • repealed in 1913
  20. Sixteenth Amendment
    • Passed by Congress July 12, 1909 and stated
    • That Congress has the power to lay and collect taxed on incomes, from whatever source derived, without apportionment among the States, and without regard to any census or enumeration
  21. Revenue Act of 1913
    Imposed a tax on the net income of individuals and corporations based on the power granted by the 16 Amendment
  22. Federal Tax Legislative Process
    • House of Representatives Ways and Means Committee
    • House Of Representatives
    • (amendments to come only if approved by W&M Committee)
    • Senate Finance Committee
    • Senate
    • (amendments can be offered)
    • If different
    • Joint Conference Committee
    • House and Senate
    • (no further amendments)
    • President
    • if vetoed two third majority from Senate and House
  23. Tax Reform Act of 1986
    Internal Revenue Code of 1986
    • Most extensive overhaul of he U.S. tax code
    • removed many deduction
    • Reduced number of people eligible for IRAs
    • Inflation adjustment-standard deduction, personal exemptions amounts, earned income credit
    • signed by Regan
  24. Tax... Act 2010
    • reduced individual tax rades
    • $1,000 child tax credit
    • tax break for students
    • two-year alternative min tax patch
    • payroll tax cut 2%
    • 100% bonus depreciation
    • enhance jobless benefits for unemployed
    • revives estate tax for decedents dying after Dec 2009
  25. American Taxpayer Relief Act of 2012
    • extension of tax breaks about to expire
    • Bush-era cuts to sunset for taxpayers with income over 400-450 K
    • alternative min tax permanently patch
    • maximum estate tax 40% with $5 million exclusion
    • raised income tax on income 400-450K to 39.6%
    • maximum capital gains tax 20%
    • 5 year extension on American Opportunity tax Credit
    • 2 year extention on certain business tax items
    • extends marriage penalty relief provisions
    • reinstates limits on itemized deduction
    • revives personal exemption phaseout
  26. Economic Objective
    Provisions of the tax law used to help stimulate or the economy, encourage capital investment, or direct resources to selected business activities
  27. Social Objectives
    Provisions of the tax law to encourage behavior (e.g., deduction for charitable contributions) or discourage behavior (e.g., illegal kickbacks are not deductible)
  28. Political Objectives
    provisions of the tax law introduced to benefit one’s own constituents or to discourage certain activities
  29. Accrual basis of accounting
    • Income accounted for when it is earned and expenses deducted when they are incurred.
    • Does not matter if money has been collected or payed
  30. Assignment of income doctrine
    • Seeks to "preserve the progressive rate structure of The Code by prohibiting the splitting of income among taxable entities."
    • courts trying to limit tax evasion
  31. Basis
    Cost of property which includes the amount of cash paid and the fair market value of other property provided in the transaction
  32. Business purpose
    A transaction must be grounded in a business purpose other than tax avoidance, which is not a proper motive for being in business.
  33. Capital asset
    • Everything owned and used for personal purposes, pleasure, or investment
    • Ex-stocks, bonds, car, gems, residence
  34. Cash basis
    Income is reported when received in money or property, and expenses are deducted only in they year they are paid.
  35. Claim of right
    • causes a taxpayer to recognize income if they receive the income even though they do not have a fixed right to the income.
    • even if it might be returned and refunded
  36. Conduits
    • An entity that is not tax paying and pass their income (loss) to owners (beneficiaries).
    • ex-partnership
  37. Constructive-receipt doctrine
    • Once an individual has an absolute right to the income, it must be recognized.
    • Ex-interest earned on bank account even if not withdrawn
  38. Entity
    • Individual, corporation, trusts, and estate.
    • They determine own tax and files own return
  39. Gross income
    Refers to all income that is taxable
  40. Holding period
    Length of time that property is held by the taxpayer, or length of time the taxpayer is treated for income tax purposes as having held it.
  41. Income
    Gain derived from capital, labor, or both
  42. Income-shifting
    Transferring income from one family member to another who is subject to a lower tax rate or the selection of a form of business that decreases the tax liability for its owners.
  43. Pay-as-you-go tax system
    The American tax system where the various types of taxpayers pay tax throughout the year, not just at year-end.
  44. Realized v. recognized gain or loss
    A gain or loss is realized when a transaction is complete. A recognized gain or loss occurs when a taxpayer is obligated to pay on a completed transaction
  45. Substance v. form
    • What the form"what u call it" is vs the substance "what is really happening"
    • ex-lease
  46. Tax benefit rule
    If a taxpayer deducted an amount from his gross income in one year resulting in a tax benefit to him or her, and an event occurred in a later year that was fundamentally inconsistent with the premise on which the deduction was based, then the taxpayer must include an amount in gross income of the current year to the extent that the amount was deducted in the prior year.
  47. Taxable income
    • The amount of income subject to tax
    • minus allowable deductions
  48. Wherewithal to pay
    Concept that the taxpayer should be taxed on a transaction when he or she has the means to pay the tax.