Shared Flashcard Set

Details

CPA REG Study Unit 13
Federal Tax Legislation, Procedures, Planning, and Accounting
55
Accounting
Professional
02/01/2014
Click here to study/print these flashcards.

Create your own flash cards! Sign up here.

Additional Accounting Flashcards

 

 

Cards

Term
TAX LEGISLATION - Legislative Process
 Definition
Tax bills are reviewed in the House Ways and Means Committee before being considered by the full House. The House version is referred to the Senate Finance Committee before being considered by the full Senate. If the Senate approves the House version as is, the bill is next presented to the President. However, the Senate often revises the House version, which requires a review by a joint House/Senate committee. The joint
committee version then returns to the House for approval, followed by the Senate, before reaching the President. If signed by the President or if Congress overrides a presidential veto by a 2/3 majority vote, the bill becomes law (IRC); otherwise, the bill (generally) dies.
Term
TAX LEGISLATION - Tax Authority
 Definition
Authoritative tax law consists of legislative law, administrative law, and judicial law. When there are conflicting sources of tax law within the same tier of the hierarchy, the most recent rule or law takes precedence.
Term
TAX LEGISLATION - Legislative Law
 Definition
Legislative law, which comes from Congress, is authorized by the Constitution and consists of the IRC and committee reports. The Internal Revenue Code of 1986 is the primary source of Federal tax law. It imposes income, estate, gift, employment, miscellaneous excise taxes, and provisions controlling the administration of Federal taxation. The Code is found at Title 26 of the United States Code (U.S.C.). The United States Code consists of 50 titles. Committee Reports are useful tools in determining Congressional intent behind certain tax laws and helping examiners apply the law properly.
Term
TAX LEGISLATION - Administrative Law
 Definition
Administrative tax law is promulgated by the Treasury department, of which the IRS is a part, and includes regulations, rules, and procedures
Term
TAX LEGISLATION - Proposed regulations
 Definition
Proposed regulations are issued to elicit comments from the public. Public hearings are held if written requests are made.
Term
TAX LEGISLATION - Temporary regulations
 Definition
Temporary regulations provide guidance to the IRS, tax practitioners, and the public until final regulations are issued. Temporary regulations have the same force and effect of law as final regulations until the final regulations are issued. Public hearings are not held on temporary regulations unless written requests are made.
Term
TAX LEGISLATION - Final regulations
 Definition
Final regulations are adopted after public comment on the proposed versions has been evaluated by the Treasury
Term
TAX LEGISLATION - Revenue ruling
 Definition
A revenue ruling is an official interpretation of Internal Revenue law as applied to a given set of facts and is issued by the Internal Revenue Service
Term
TAX LEGISLATION - Revenue procedure
 Definition
A revenue procedure is an official IRS statement that prescribes procedures that affect the rights or duties of either a particular group of taxpayers or all taxpayers.
Term
TAX LEGISLATION - Internal Revenue Bulletin (IRB)
 Definition
The Internal Revenue Bulletin (IRB) is the authoritative instrument of the Commissioner of Internal Revenue for announcing official IRS rulings and procedures and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published on a weekly basis by the Government Printing Office.
Term
TAX LEGISLATION - IRS Publications
 Definition
IRS Publications explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating Service positions, and include worksheets. Publications are not binding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position.
Term
TAX LEGISLATION - Judicial Law
 Definition
Judicial law originates from the federal court system and is primarily comprised of court opinions
Term
TAX LEGISLATION - Tax Court
 Definition
Decisions of the Tax Court are issued as either regular decisions or memorandum decisions.
Term
TAX LEGISLATION - U.S. Supreme Court
 Definition
The U.S. Supreme Court can exercise its discretionary authority to review decisions of the courts of appeals and other federal courts
Term
TAX LEGISLATION - Tax Research
 Definition
Tax research is the process of gathering situational facts, applying the most appropriate tax authorities, and clearly communicating the findings to the taxpayer/client or other interested parties. It involves analysis of information and drawing conclusions that will hold up before the IRS or the courts
Term
TAX PROCEDURES - Tax Prepayments and Penalties
 Definition
The IRC is structured to obtain at least 90% of the final tax through
withholding
and
estimated tax
payments. Individuals who earn income not subject to withholding
must pay estimated tax on that income in quarterly installments.
Term
TAX PROCEDURES - Estimated tax Payments
 Definition
For a calendar-year taxpayer, the installments are due by April 15, June 15, and September 15 of the current year and January 15 of the following year. Dates are adjusted for weekends and holidays
Term
TAX PROCEDURES - treated as prepayment of tax
 Definition
Overpayment of tax in a prior tax year, which has not been refunded
Amounts withheld (by an employer) from wages
Direct payment by the individual (or another on his/her behalf)
Excess FICA withheld when an employee has two or more employers during a tax year who withheld (in the aggregate) more than the ceiling on FICA taxes
Term
TAX PROCEDURES - Estimated tax Payments
 Definition
Each installment must be 25% of the least of the following amounts:
a) 100% [110% for taxpayers whose prior year’s AGI exceeds $150,000 ($75,000 for married filing separately)] of the prior year’s tax (if a return was filed)
b) 90% of the current year’s tax
c) 90% of the annualized current year’s tax (applies when income is uneven)
Term
TAX PROCEDURES - Filing Requirements
 Definition
An individual must file a federal income tax return if gross income is above a threshold, net earnings from self-employment is $400 or more, or (s)he is a dependent with more gross income than the standard deduction or with unearned income over $1,000.
Term
TAX PROCEDURES - Due Dates and Related Extensions - Individual
 Definition
Individual tax returns must be filed (postmarked) no later than the 15th day of the 4th month following the close of the tax year. This is April 15 for calendar-year taxpayers. An automatic 6-month extension is available by filing Form 4868. This extends the deadline to October 15 for calendar-year taxpayers. The extension does not grant any additional time to pay taxes due.
Term
TAX PROCEDURES - Due Dates and Related Extensions - Corporate
 Definition
Corporate tax returns, including for S corporations must be filed (postmarked) no later than the 15th day of the 3rd month following the close of the tax year. This is March 15 for calendar-year taxpayers. An automatic 6-month extension is available by filing Form 7004. This extends
the deadline to September 15 for calendar-year taxpayers. The extension does not grant any additional time to pay taxes due.
Term
TAX PROCEDURES - Due Dates and Related Extensions - Partnership and trust
 Definition
Partnership and trust tax returns must be filed (postmarked) no later than the 15th day of the 4th month following the close of the tax year. This is April 15 for calendar-year taxpayers. An automatic 5-month extension is available by filing Form 7004. This extends the deadline to September 15 for calendar-year taxpayers.
Term
TAX PROCEDURES - Due Dates and Related Extensions - Exempt organizations
 Definition
Exempt organizations are generally required to file annual information returns by the 15th day of the 5th month following the close of the taxable year. Form 8868 can be filed to request both an automatic 3-month extension and an additional 3-month extension if needed.
Term
TAX PROCEDURES - Due Dates and Related Extensions - Estate
 Definition
Estate tax returns are due within 9 months after the date of the decedent’s death. An extension of up to 6 months may be granted by filing Form 4768.
Term
TAX PROCEDURES - Disclosure of Tax Positions
 Definition
A taxpayer’s accuracy-related penalty due to disregard of rules and regulations, or substantial understatement of income tax, may be avoided if the return position is adequately disclosed and has a reasonable basis. Generally, the penalty is equal to 20% of the underpayment. The penalty is not figured on any part of an underpayment on which the fraud penalty is charged.
Term
TAX PROCEDURES - Recordkeeping
 Definition
Books of account or records sufficient to establish the amount of gross income, deductions, credit, or other matters required to substantiate any tax or information return must be kept. Records must be maintained as long as the contents may be material in
administration of any internal revenue law. Employers are required to keep records on employment taxes until at least 4 years after the due date of the return or payment of the tax.
Term
TAX PROCEDURES - Claim for Refund
 Definition
A claim for refund must be made within the statute of limitations period for refunds. A claim must be filed by the later of 3 years from filing the return or 2 years after the tax was paid.
Term
TAX PROCEDURES - Assessment of Deficiency
 Definition
A deficiency is any excess of tax imposed over the sum of amounts shown on the return plus amounts previously assessed (reduced by rebates). Assessment of tax is made by recording the liability of the taxpayer in the office of the Secretary of the Treasury.
Term
TAX PROCEDURES - Assessment of Deficiency
 Definition
Computerized examination or audit of a return may result in an IRS examiner proposing an addition to tax. A letter stating the proposal is sent to the taxpayer. It is referred to as a 30-day letter.
Term
TAX PROCEDURES - Assessment of Deficiency
 Definition
If consensus is not reached with the examiner in a conference with his/her supervisor or from an administrative appeal, a notice of deficiency (ND) is mailed to the taxpayer, but no sooner than 30 days after a 30-day letter.
Term
TAX PROCEDURES - Assessment of Deficiency
 Definition
The general statute of limitations (S/L) for assessment of a deficiency is 3 years from the later of the date the return was due or the date it was filed.
Term
TAX PROCEDURES - Assessment of Deficiency
 Definition
The S/L is 6 years if there is omission of items of more than 25% of gross income stated in the return. Gross income includes gross receipts before deduction for cost of goods sold. Only items completely omitted are counted
Term
TAX PLANNING - Timing
 Definition
The timing technique accelerates or defers recognition of income and/or deductions. The advice most often heard is to defer income and accelerate deductions. This results in the lowest tax liability for the current year. However, in a year in which the
taxpayer’s rates are lower than the rates will be the following year, it is advisable to do just the opposite.
Term
TAX PLANNING - Shifting
 Definition
The basics of income shifting typically relate to moving income and therefore the accompanying tax liability from one family member to another who is subject to a lower marginal rate, or moving income between entities and their owner(s). However, tax planning also involves shifting income from one tax jurisdiction to another with different marginal tax rates.
Term
TAX PLANNING - Shifting
 Definition
Three key terms when discussing shifting income are “assignment of income doctrine,” “related party transaction,” and “arm’s-length transaction.” An arm’s-length transaction occurs when the involved parties act independently, regardless of any relation between the parties. The purpose of these transactions is to guarantee that all parties act in their own self-interest and not for the common good of all the parties involved to the detriment of the IRS.
Term
TAX PLANNING - Conversion
 Definition
Converting income from a less favorable category to a more favorable one can be achieved in various ways. Favorable conversions include converting ordinary income property into capital gain property. The opposite applies for losses. Even better than converting property from a high tax rate to a low rate is converting it to nontaxable property.
Term
TAX PLANNING - Avoidance vs. Evasion
 Definition
Tax avoidance is the minimization of tax liability through legal arrangements and transactions. The goal of a business is to maximize profits, and tax avoidance is a key element in obtaining this goal. Avoidance maneuvers take place prior to incurring
a tax liability. Tax evasion takes place once a tax liability has already been incurred (i.e., taxable actions have been completed). A key distinction between avoidance and evasion is taxpayer “intent.” A taxpayer’s intent is called into question when one of the “badges” of fraud is identified. These indicators include understatement of income, improper allocation of income, claiming of fictitious deductions, questionable conduct of the taxpayer, and accounting irregularities
Term
ACCOUNTING METHODS - Tax Year
 Definition
The accounting method determines the tax year in which an item is includible or deductible in computing taxable income. The method must clearly reflect income. Federal income tax is imposed on taxable income measured for a taxable period, usually annual. A person’s tax year is the annual accounting period used to keep the person’s books and records. A calendar or fiscal tax year is adopted in a person’s first tax year. A calendar year is the 12-month period ending on December 31. A fiscal year is any 12-month period ending on the last day of a month. A 52- or 53-week tax year is also allowed.
Term
ACCOUNTING METHODS - Accounting Method
 Definition
A person must use the method of accounting regularly used to compute income in keeping books and records. The cash method and the accrual method are the most common. Specific provisions of the Internal Revenue Code (IRC) may override and require specific treatment of certain items. Change in accounting methods generally requires consent of the IRS, including change in either the overall system of accounting for gross income or deductions, or treatment of any material item used in the system.
Term
ACCOUNTING METHODS - Cash Method
 Definition
A cash-method taxpayer accounts for income when one of the following occurs:
1) Cash is actually received
2) A cash equivalent is actually received
3) Cash or its equivalent is constructively received
Term
ACCOUNTING METHODS - Cash Method
 Definition
Receipt or constructive receipt by an agent is imputed to the principal
Term
ACCOUNTING METHODS - Cash Method
 Definition
Prepaid rent is gross income when received.
1) Security deposits are not considered income.
2) Tenant improvements, in lieu of rent, are included.
3) Lease cancelations are included.
4) Advance rental payments must be deducted by the payee during the tax periods to which the payments apply.
Term
ACCOUNTING METHODS - Cash Method
 Definition
An employee who receives $20 or more in tips a month working for any employer must report the tips to the employer by the 10th day of the following month. The tips are gross income when reported.
Term
ACCOUNTING METHODS - Accrual Method
 Definition
An accrual-method taxpayer accounts for income in the period it is actually earned. The accrual method is required of certain persons and for certain transactions. A taxpayer that maintains inventory must use the accrual method with regard to purchases and sales.
Term
ACCOUNTING METHODS - Hybrid Methods
 Definition
Any combination of permissible accounting methods may be employed if the combination clearly reflects income and is consistently used. If inventory is used, the accrual method must be used for purchases and sales. The cash method may be used for other receipts and expenses if income is clearly reflected.
Term
ACCOUNTING METHODS - Inventory
 Definition
Gross income includes receipts reduced by cost of goods sold (COGS), whether purchased or manufactured.
Term
ACCOUNTING METHODS - Long-Term Contracts
 Definition
A long-term contract is a contract completed in a tax year subsequent to the one in which it was entered into for building, construction, installation, or manufacturing. Long-term manufacturing contracts are for items that normally require more than 12 months to complete or that are unique and not usually inventory items.
Term
ACCOUNTING METHODS - Long-Term Contracts - Completed-contract method
 Definition
Receipts and expenditures are accounted for (reported) in the tax year in which the contract is completed. The method is allowed only for Home construction projects or Small businesses (average annual gross receipts not greater than $10 million for the 3 preceding tax years) for construction contracts expected to take not greater than 2 years to complete.
Term
ACCOUNTING METHODS - Long-Term Contracts - Percentage-of-completion method
 Definition
The taxpayer reports as income that portion of the total contract price that represents the percentage of total work completed in the year. It may be measured by the ratio of costs for the tax year to total expected costs.
Term
ACCOUNTING METHODS - Installment Method
 Definition
The installment method is required for installment sales by both cash-method and accrual-method taxpayers, unless an election is made not to apply the method.
Term
MULTIPLE JURISDICTIONS - Multijurisdictional Issues for State Taxes
 Definition
A tax jurisdiction is a geographic area with its own distinct set of tax rules and regulations, e.g., a municipality, county, state, or country. When a taxable transaction has occurred across multiple jurisdictions, authoritative guidance must be established in order to reconcile or override the distinct sets of tax rules that may apply.
Term
MULTIPLE JURISDICTIONS - Public Law 86-272
 Definition
Before a state can tax a nonresident (e.g., a resident of another state), a minimum presence in the taxing state by the nonresident must be established. Sufficient presence to tax the nonresident is nexus.
Term
MULTIPLE JURISDICTIONS - Public Law 86-272 - Nexus
 Definition
Public Law 86-272 limits the state’s ability to tax the net income of nonresidents by establishing the following nexus rules: Nexus is not established if Activity is limited to solicitation of orders for tangible personal property, The orders are sent out of state for approval or rejection, and The orders are filled by shipment or delivery from a point outside the state if approved.
Term
MULTIPLE JURISDICTIONS - The Uniform Division of Income for Tax Purposes Act (UDITPA)
 Definition
The UDITPA was drafted by the National Conference of Commissioners on Uniform State Laws and is recommended for enactment in all states. Each state decides whether or not to adopt the act. Once nexus is established, net income must be accurately allocated or apportioned among the various jurisdictions. The UDITPA provides a uniform method for allocating and apportioning a business’s income. The rules for the business’s nonbusiness income are different than those for the business’s business income. Nonbusiness income is all income other than business income. It is allocated, not apportioned. Specific rules apply to nonbusiness income from rents, royalties, capital gains, interest, dividends, patents, and copyrights.
Supporting users have an ad free experience!