any decrease in tax due to a new tax law must be offset by an equal increase in a tax
imposed on another group - revenue neutrality
a rule that a new law (or new measure) expires at a specific date unless further
legislative action is taken to extend the law; if no action is taken, the original law is
reinstated - sunset provision
a situation where inflation causes a given level of income into higher income tax
brackets; the result is an increase in income taxes but no increase in real purchasing
power of the underlying income - bracket creep
a Congressional response to bracket creep whereby tax brackets, standard deductions,
personal and dependency exemptions, etc are adjusted for inflation - indexation
What deemed incoe tax unconstitutional? - Pollock v. Farmers' Loan & Trust (1895)
What amendment allowed income taxes? - 16th Amendment (1913)
What is the current tax law named? - Internal Revenue Code of 1986
Examples of tax laws and their objectives: define gross income broadly - Raise
revenues for the government and avoid loopholes
Examples of tax laws and their objectives: progressive tax rates - Social objectives (tax
those who can afford to pay and enable taxpayers)
Examples of tax laws and their objectives: charitable contribution deductions - Social
objectives (encourage helping the needy)
Examples of tax laws and their objectives: deny deductions of bribes and fines - Social
objectives and discourage certain activites
Examples of tax laws and their objectives: accelerated depreciation - Encourage certain
activites and economic objectives
What are the four components of Adam Smith's "Canons of Taxation"? - Equality,
certainty, convenience, economy
Canons of Taxation: what is equality? - Fair and equitable
What is horizontal equality? - Taxpayers with the same income pay the same tax
,What is vertical equality? - Taxpayers with more income pay more tax
Canons of Taxation: what is certainty? - Clear and predictable
What is taxpayer certainty? - Predictable tax liability and timing of when/where taxes are
due
What is government certainty? - Predictable source of revenue
Canons of Taxation: what is convenience? - Easily assessed, collected, and
administered
What is taxpayer certainty of convenience? - Taxpayers should not be too burdened
with record keeping and compliance costs
What is government certainty of convenience? - US income tax is a voluntary
compliance system where taxpayers are requested to volunteer their financial
information
Canons of Taxation: what is economy? - Minimal compliance and administrative costs
What are the three types of tax rates? - Flat, progressive, regressive
Q: Which tax rate is the most useful for tax planning decisions? - MTR
What are the top three federal revenue sources? - Individual income taxes (42%),
payroll taxes (40%), and corporate income (9%) taxes
What percentage of US population was subject to federal income taxes in 1939? - 6%
What percentage of US population was subject to federal income taxes in 1945? - 74%
What are the roles of the IRS? - Collection of taxes, enforcement of tax laws,
interpretation of statutory tax law
What is the chance of being audited? - 1%
What are the three types of audits? - Correspondence, office, field
What is a correspondence examination? - A limited scope mail audit with usually a
single question
What is an office examination? - A local district IRS office exam limited in scope
What is a field examination? - An audit performed where the books are kept
, What is tax avoidance? - The use of legal methods to modify an individual's financial
situation in order to lower the amount of income tax owed
What is tax evasion? - The use of illegal methods to lower the amount of taxable income
reported
Q: Tax avoidance or evasion: Homeowners pay property taxes based on the value of
their home. Jim pays his property taxes in December of Year 1 rather than waiting until
January of Year 2 due date. Jim itemizes the property tax on Year 1 tax return -
Avoidance
Q: Tax avoidance or evasion: Cash basis taxpayers can claim a deduction for business
expenses paid during the year. On December 27, Year 1, Jim writes a check to pay his
business' November Year 1 utility bill. He mails the check on January 3, Year 2. He
deducts the payment on his Year 1 tax return. - Evasion
Q: Tax avoidance or evasion: Jim invests $20,000 to purchase 1,000 shares of a mutual
fund. Near the end of the year, the mutual fund pays a $3 dividend per share. Jim
instructed the fund manager to automatically reinvest dividends. Jim reports no dividend
income on this year's tax return but likewise keeps his basis in the shares at their
original cost so he will recognize the income when he sells his shares. - Evasion
What is the due date for income taxes? - 15th day of the 4th month after year-end
What is the general statute of limitations? - 3 years after the later of: (1) date filed or (2)
due date
What is the statute of limitations if gross income is omitted that exceeds 25%? - 6 years
What is the statute of limitations for failing to file? - Infinite
What is the statute of limitations for filing a fraudulent return? - Infinite
Jane files her 2014 income tax return on February 1, 2015. Her brother, Pete, wants to
circumvent the three-year statute of limitations. He files his 2014 income tax return on
December 31, 2017. Both tax returns were properly signed and mailed to the IRS.
When does the statute of limitations for each tax return expire? - Jane: April 15, 2018
Pete: December 31, 2020
Ted files his federal income tax return two months after year-end. He reports $100,000
of income on his return, but that figure fails to include 30,000 of his income earned from
self-employment. Is Ted's statute of limitations three years, six years, or infinite? - 6
years
Ted files his federal income tax return two months after year-end. Ted's gross income is
$130,000, but he omits $30,000. What is Ted's statute of limitations? - 6 years
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