Taxation Midterm Chapters 1-7
1. (1) discriminant function system (DIF) (2) document perfection program (3) information
matching program the IRS uses computer systems to sort returns that may have
understated tax liability; name the three systems that the IRS uses
2. (1) married filing jointly (2) married filing separately (3) qualifying widow or widower
(surviving spouse) (4) single (5) head of household List the five filing statuses
3. (1) timing (2) income shifting (3) conversion what are the three basic tax planning
strategies?
4. (1) understand the facts (2) identify issues (3) locate relevant authorities (4) analyze the
tax authorities (5) communicate research results What are the five steps of tax research?
5. $3,900 What is the amount of the personal and dependency exemption
6. 30-day letter (gives you 30 days to do either of the two things) after the audit – the IRS
will give you a list of adjustments to make; first the IRS will send you this which gives
you a certain amount of time to either 1) request a conference with an appeals officer, or 2)
agree to the proposed adjustment
7. 90-day letter (explains that the taxpayer has 90 days to either of the two things) after the
audit – the IRS will give you a list of adjustments to make; then (secondly) explains that
the taxpayer has a certain amount of time to either 1) pay the proposed deficiency, or 2)
file a petition in the US tax court
8. Abandoned Spouse The taxpayer is married at the end of the year (or is not legally
separated from the other spouse)
The taxpayer does not file a joint return with the other spouse
The taxpayer pays More than Half the costs of maintaining his or her home for the
ENTIRE year
the home is the principal residence for a child (who qualifies as the taxpayer’s dependent)
for More than Half the year
the taxpayer lived apart from the other spouse for the last six months of the year (the other
spouse did not live at all in the taxpayer’s home during the last six months)
9. Ad Valorem a tax based on the value of property; tax base is the fair market value of the
property
10. annuity an investment that pays a stream of equal payments over time
11. April 15th (fifteenth day of the fourth month following year end) Individual Tax return
due date
12. April 15th (fifteenth day of the fourth month following year end) partnership tax return
due date
13. assignment of income doctrine holds that the taxpayer who earns the income from
services must recognize the income.
Created when people tried to shift income by having it taxed at another person’s rates
while still receiving it. Now in order to do that the right to ownership must be transferred
as well.
14. assignment of income doctrine requires income be taxed to the taxpayer who actually
earns it
15. Average Tax Rate Total Tax /Taxable Income
16. Average Tax Rate represents a taxpayer’s average level of taxation on each dollar of
taxable income
17. Both State and Federal Is it Federal or State and Local Tax? –
Income Tax
18. Both State and Federal Is it Federal or State and Local Tax? –
Excise Tax
19. Brackets a subset (or portion) of the tax base subject to a specific tax rate.
20. business activities require a relatively high level of involvement or effort
21. business activities motivated by profit
22. Business Decisions what organization form to take; where to locate; how to
compensate employees; appropriate debt mix; owning vs. renting equipment and property;
how to distribute profits, and so forth – these questions are asked in reaching what?
23. the business doctrine allows the IRS to challenge and disallow business expenses and
transactions with no underlying business motivation
24. Certainty means taxpayers should be able to determine when, where, and how much
tax to pay
25. Circular 230 provides regulations governing tax practice and applies to all persons
practicing before the IRS
26. Civil Penalties More common, generally come in the form of monetary penalties, and
may be imposed when tax practitioners or taxpayers violate tax statutes without reasonable
cause
27. Claim of right doctrine created to address the timing of income recognitionWas created
when a taxpayer received income in one period but was required to return it in a
subsequent periodStates the income has been realized if a taxpayer receives income and
there are no restriction on the use of that income Despite clawback provisions for bonuses
the taxpayer would include it in income in the year received because there are virtually no
restrictions on the amount and the use of it.
28. constructive receipt doctrine provides that a taxpayer must recognize income when it is
actually or constructively received
29. constructive receipt doctrine states that a taxpayer realizes and recognizes income
when it is actually or constructively received. Deemed to occur when the income has been
credited to the taxpayer’s account or when the income is unconditionally available to the
taxpayer’s account and there are no restrictions on the amount.
30. Convenience means a tax system should be designed to facilitate the collect of tax
revenues without undue hardship on the taxpayer or the government
31. Correspondence Examinations an IRS audit conducted by mail and generally limited to
one or two items on the taxpayer’s return. Among the three types of audits, these audits are
generally the most common, the most narrow in scope and the least complex. The IRS
typically requests supporting documentation for one or more items on the taxpayer’s return
(e.g. documentation of charitable contributions deducted)
32. Criminal Penalties much less common; commonly charged in tax evasion cases
