Exam (elaborations)
TAX 4001 Exam 1 (1)
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Exam of 5 pages for the course ree 3433 at ree 3433 (TAX 4001 Exam 1 (1))
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TAX 4001 Exam 1Proportional Tax - ANS--applies the same rate on all income, ex: Sales Tax
-Also known as a flat tax rate
= Tax Base X Tax Rate
Regressive Tax - ANS--applies a decreasing rate as the tax base increases, ex: Social
Security Taxes (Payroll Taxes)
-as the tax base increases, the taxes paid increase, but the marginal tax rate decreases
(not common)
Progressive Tax - ANS--imposes an increasing marginal rate as the tax base increases,
ex: Federal & State Income Taxes
-as the tax base increases, both the marginal tax rate & the taxes paid increase
Average Tax Rate - ANS--the total taxes calculated divided by the taxable income
-represents a taxpayer's average level of tradition on each dollar of taxable income
=Total Tax/Taxable Income
-used in budgeting tax expense as a portion of income, determining what percent of
taxable income earned is paid in tax
Marginal Tax Rate - ANS--the rate of tax on the next dollar earned
-the tax rate that applies to the next additional increment of a taxpayer's taxable
income(or deduction)
(New Total Tax-Old Total Tax)/
(New Taxable Income-Old Taxable Income)
Who Pays the greatest % of Taxes? - ANS--Individual taxpayers with income taxes and
payroll taxes
-Corporations pay a very small % compared to individuals
Objectives of US Tax Payer - ANS--Raising Revenues (IRS)
-Socials Objects (limit or encourage having children)
-Economic Reasons
Explicit Taxes - ANS--include most direct taxes, Ex: income, property, and sales taxes
-a tax directly imposed by the government
, Implicit Taxes - ANS--indirect taxes generally resulting from making certain expenses
deductible to others
-Ex: tax free municipal bond interest is not taxable, and thus are favored for those
taxpayers who own them
Statute of Limitations - ANS--limitations for IRS to audit a tax return
-For both amended tax returns filed by a taxpayer and proposed tax assessments by
the IRS, the statute of limitations generally 3 years from the later of
1) the date the tax return was filed
-or-
2) the tax return's original due date
-If unintentional failure to include more than 25% of the AGI on the filed tax return, the
statute of of limitations is extended to 6 years
-If intentionally failed to include any income, or did not file a return at all, the Statute of
Limitations never starts, and the IRS can audit any time in the future
Correspondence Audit - ANS-- most common audit
- conducted by mail and generally are limited to one or two items on the taxpayer's
return
- generally the narrowest in scope and least complex
- typically the IRS requests supporting documentation for one or more items
Office Examinations - ANS-- 2nd most common audit
- conducted at an IRS local office
- typically broader in scope and more complex than correspondence examinations
- more likely for small businesses, sole proprietorship, and middle-to-high income
individual taxpayers are more likely if audited
- taxpayers may attend the examinations alone, with representation, or let their
representation attend for them
Field Examinations - ANS-- least common audit
- conducted @ taxpayers place of business
- can last months or even years
DIF (Discriminant Function) - ANS-- assigns a score to each tax return that represents
the probability the tax liability on the report has been under reported
(higher report = higher likelihood of under reporting)
Post Audit - ANS-- 30 day letter issued and taxpayer can use the IRS Appeals Process
- If not, 90 day letter is issued and taxpayer may appeal to the Tax Court
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