Tax
Chapter 1-
INTRODUCTION AND SOME KEY CONCEPTS
Introduction
This course deals with the federal income taxation of individuals.
B. Economic and Fiscal Importance of the Federal Income Tax
Revenue
a. Indiv. Income takes- about 48 % of what fed. gov’t takes in.
2. Taxpayers
3. Economic, Social, and Fiscal Ramifications
C. Where is “the Tax Law”
1. The IRS Code of 1986 (the IRC), as amended
2. Treasury Regulations
3. Procedural Regulations
4. Revenue Rulings, Ruling Procedures, and Announcements
5. IRS Memoranda
6. Private Letter Rulings
7. Case law authority
D. The Tax Base: Taxable Income
– To determine the individual’s income tax liability
1. Determine gross income from all sources for the year (generally- cash, FMV of property, and FMV of services received as compensation. For manufacturing, merchandising, gross income means total sales [total prices paid for goods] minus the cost of goods sold, plus any other income from investments or other operations or sources)
2. Subtract deductions
a. Adjustments to gross income
b. Itemized deduction
You now have taxable income, which is the tax base.
3. Multiply tax base by the tax rate.
4. Subtract any tax credits
5. Pay the balance to the IRS.
*See Form 1040 in back of book.
E. Annual Tax Periods and Methods of Accounting
1. Calendar year / Fiscal year
2. Accounting methods: cash receipts and disbursements vs. accrual.
F. The Graduated Rate Structure
1. graduated/ progressive
2. marginal tax rates = a taxpayer’s last dollar of income.
3. effective tax rates = rates applicable to economic income, as opposed to
(legalistic) taxable income.
4. Proportional/flat tax = tax everyone at the same rate.
G. Tax Procedure and Administration
-examination (audit)- office or field
-s.t. p. 17-20
Burke v. Commissioner, T.C.M., 1997- s.t. p. 21-24.
Is 7430 fair?
From a practice point of view, lawyer must look at 7430 closely to make
sure that the ball isn’t dropped…
West Black Letter series – “Fundamentals…” is his preferred hornbook.
– but we don’t nec. Need it.
—
– an outline is on reserve.
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THE LARGE PICTURE
Taxes – rate and a base.
Amount + percentage.
This course- def. of fed. Income tax base.
(the hard part)
-lately, rates have declined, esp. for the highest income people.
– also, social security tax.
– fed. Gift tax on large gratuitous transfers.
– estate tax.
– excise taxes.
– Authorities in the tax sphere-
– all the ones in the book.
– also, tax treaties w/ other countries.
– the later in time will prevail in terms of treaty v. code.
– also, internationally, GATT restricts the abilities of countries to impose certain taxes, rebates, but does allow them for excise. This can be a big deal…
–
– also VAT- popular in Europe, Japan, etc.
Who pays fed. Income taxes?
People, corporations, estates, trusts, inter alia.
—Tax procedure—-
-under 1% chance you’ll be audited if you make over 100 K this year.
– then why not cheat?
-What kind of penalties would be effective? Mathematically, only big ones.
– Why don’t most people cheat?
1) Reporting to the gov’t….you can actually squeal/ inform on people.
Etc.
—How does an audit work?—-
IRS has an audit division in every region.
-“field” audit or “office” audit
-summons process- self-executing.
-interaction/ongoing process.
– a write-up.
– a thirty-day letter.- “You have 30 days to appeal.”
-Person can do a protest letter.
-Appeals conference w/an appeals officer…
-sometimes a settlement….but a rule- if the odds are 80 % or better that taxpayer will win on the issue, taxpayer gets all; if odds are 20% or less, taxpayer gets nothing.
Possibilities:
– everything is settled at appeals conference.
– nobody agrees on anything.
*The IRS can issue a 90-day letter. Gives person 90 days to file petition in tax court. On day 91, the person can be in big trouble. By goin
ut. (§6501(a),(b) and §6512(a)). Answer: April 15, year 5. (three years from April 15)
(2) She also wonders if it is true that the IRS could force her to extend the statute of limitations and if so, what she should do (§6501(c)(4)). Answer: The Statute of limitations can only be extended with her consent.
(b) Same as “(a),” but she willfully concealed a lot of income from the IRS (§6501(c) and §6531). Answer: At any time.
(c) Same as “(a),” but she never filed her year one return (Form 1040) (§6501(c)). Answer: At any time.
Crim.- 6 yrs.
(d) Instead of owing money, she forgot a big deduction and thinks she is entitled to a refund. You warn her that she will have to file an amended return, and that the statement of procedural rules §601.105(d)(2) requires the IRS to review the entire return, which may reveal new weaknesses in the return, but she says she can live with that. So, she asks, what is the last day she can file for the refund (§6511(a))? Answer: 3 years after the return or 2 years after payment.
(e) Some months have passed and she is in the midst of an audit. The agent has issued her a summons (1) for various documents, some of which are embarrassing and, she thinks, not pertinent to the audit and (2) to give testimony. What can be done to stop this (§7602(a), (c)) – the summonses are not self-enforcing. Ms. Burke could allege many things, e.g. const. violations.
(f) You have done such a fine job that Ms. Burke has said good things about you to her volatile cousin, Larry. Recently, Larry was also notified that he was about to be audited about his business expense deductions, and he feels the revenue agent is insinuating that he is a liar. He is furious and says, “I am taking this to court, period!” What advice would you give him? No injunctions
