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Tax 4001 Exam 1: Key Concepts and Definitions, Exams of Accounting

A comprehensive overview of essential tax concepts and definitions relevant to tax 4001. It covers various aspects of tax law, including tax return positions, accounting methods, administrative authorities, tax avoidance, and tax fraud. The document also explores different types of audits, tax rates, and the statute of limitations for tax audits. It is a valuable resource for students studying tax law and provides a solid foundation for understanding key principles.

Typology: Exams

2023/2024

Available from 12/17/2024

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TAX 4001 Exam 1
#1 Tax Return Positions - ANS-file tax returns taking a position that has a realistic
possibility of being sustained if challenged (1 in 3 possibility)
#2 Try to Answer All Questions on Returns - ANS-sometimes there are situations where
the taxpayer does not have to answer all questions
#3 Procedural Aspects of Preparing a Return - ANS-a tax preparer may rely on
information provided without auditing unless the information appears to be incorrect
#4 Use of Estimates - ANS-estimates can be used, under some circumstance, on a filed
tax return
#6 Knowledge of Error - ANS-If a tax professional knows about an error in a tax return,
they must advise the taxpayer to file a correct return. The tax professional may not
inform the IRS without the taxpayer's permission
Accounting Methods for Tax - ANS-- must use cash or accrual method or a hybrid of the
two
Accrual Income - ANS-income when the all events test is met
Administrative Authorities - ANS-Treasury and IRS Pronouncements
AICPA Statements on Standards for Tax Services - ANS-- binding only for members of
the AICPA
- may not be used as the standard care required for non-AICPA member professionals
Assignment of Income Doctrine - ANS-requires income to be taxed to the taxpayer who
actually earns it
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
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TAX 4001 Exam 1

#1 Tax Return Positions - ANS-file tax returns taking a position that has a realistic possibility of being sustained if challenged (1 in 3 possibility) #2 Try to Answer All Questions on Returns - ANS-sometimes there are situations where the taxpayer does not have to answer all questions #3 Procedural Aspects of Preparing a Return - ANS-a tax preparer may rely on information provided without auditing unless the information appears to be incorrect #4 Use of Estimates - ANS-estimates can be used, under some circumstance, on a filed tax return #6 Knowledge of Error - ANS-If a tax professional knows about an error in a tax return, they must advise the taxpayer to file a correct return. The tax professional may not inform the IRS without the taxpayer's permission Accounting Methods for Tax - ANS-- must use cash or accrual method or a hybrid of the two Accrual Income - ANS-income when the all events test is met Administrative Authorities - ANS-Treasury and IRS Pronouncements AICPA Statements on Standards for Tax Services - ANS-- binding only for members of the AICPA

  • may not be used as the standard care required for non-AICPA member professionals Assignment of Income Doctrine - ANS-requires income to be taxed to the taxpayer who actually earns it 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

C Corporation - ANS-not a flow through entity. All income and loss and deductions stay inside the corporation and are not available to shareholders. The entity pays its' own taxes directly. Circular 230 - ANS-Issued by the IRS, provides regulations governing tax practice and applies to all persons practicing before the IRS 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 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) Double taxed as ___________ are paid with after tax dollars and _____________ payments are not deductible to the corporation, but are ___________ income to the shareholders if individuals. - ANS- Explicit Taxes - ANS--include most direct taxes, Ex: income, property, and sales taxes -a tax directly imposed by the government Field Examinations - ANS-- least common audit
  • conducted @ taxpayers place of business
  • can last months or even years GAAP wants to report all possible _____________ and defer ____________. - ANS-- expenses
  • income If the prepaid business expense payments are for expenses that do not last more than ___________ and do not extend past ______________, they may be deducted when paid. - ANS-- a year
  • the end of the next taxable year Implicit Taxes - ANS--indirect taxes generally resulting from making certain expenses deductible to others

Proportional 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) Secondary Sources - ANS-Everything that is NOT a primary source 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 Statutory Authorities - ANS-- IRS Code
  • US Constitution
  • Treaties
  • Committee Reports: Senate Finance Committee Report
  • House Ways and Means Committee Report Tax Avoidance - ANS-is okay as it is legitimate tax planning Tax Courts - ANS-don't pay first, tax expert judges Tax Fraud - ANS-is not okay as it is illegal and may result in fines and jail Tax wants to report ALL ____________ and defer ____________. - ANS-- income
  • expenses Taxpayers cannot ____________ prepaid expenses for interest expense. - ANS-- deduct

Taxpayers Who Benefit from Income Shifting

  1. Related parties, family members or businesses and their owners, who have varying _____________ and who are willing to shift income for __________________. - ANS-- marginal tax rates
  • the benefit of the group The tax costs of income and tax savings of deductions vary as ________________ change. - ANS-tax rates Timing - ANS-- deferring or accelerating taxable income and tax deductions Timing of when income is taxed/expenses deducted affects ______________ of the taxes paid on income/savings on deductions. - ANS-present value Trial Courts - ANS-- Tax Courts
  • US District Court
  • US Court of Federal Claims US Court of Federal Claims - ANS-pay first, no jury US District Court - ANS-pay first, jury available Who Pays the greatest % of Taxes? - ANS--Individual taxpayers with income taxes and payroll taxes -Corporations pay a very small % compared to individuals