Income Tax Fundamentals
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Internal Revenue Code: the law
• Treasury Regulations: clarify and interpret tax
laws
• Legislative: the law
• Interpretative: not binding on the courts
• Proposed: what IRS thinks; gather reaction
• Temporary: law until we change our mind
Income Tax Fundamentals
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Revenue Rulings
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Here’s what we think…
Generally a situation impacting several taxpayers
Revenue Procedure
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Here’s how you do this…calculate interest on related
party loans
Private Letter Rulings
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Here’s what we think of your situation
Requested by taxpayer; binding on IRS if facts in
request accurate
TAM: requested by IRS
Income Tax Fundamentals
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Tax Court
• Judges
• Not required to pay taxes then appeal
• File within 90 days of IRS deficiency notice
• Must follow prior U.S. Court of Appeals
decisions in district
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U.S. District Court
• Pay first, then sue for refund
• Decisions binding in that district
Income Tax Fundamentals
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U.S. Court of Appeals
• Appeals Tax Court, District Court decisions
• Decisions binding for courts which appeal to
that district
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Small Tax
• Issue involves less than $50,000 in tax
• Decision can not be appealed
Legislation
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Originates in House Ways/Means
Passes House, goes to Senate Finance
If passes Senate,
• Goes to President if same as House bill
• Goes to Conference Committee if different
Secondary authority: explanation of tax
law
• Committee reports
Compliance
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Who Must File
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MFJ: $18,700
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MFS: avoid joint liability
Single: $9,350 (not dependent)
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Dependents: Unearned income > $950
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Self-employed: >$400 SE income
• Standard deduction: $11,400 for 2009
• Personal exemption: $3,650 for 2009
• Who would want to file anyway?
• Standard deduction: $5,700 for 2009
• Under age 18, college student
Filing Status
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MFJ:
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Surviving spouse:
• What determines in married for year?
• MFJ for two additional years if dependent
child
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Head of household:
• Dependent child:
• Under 19 or student under 24
Filing
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Date postmarked
• Weekends, holidays
• Extensions: six month automatic
• For filing; not for paying tax
Audits
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Generally three year statute of limitations
• Substantial underpayment (omit greater of
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25% of income or $5,000): six years
Fraud: six years
Don’t file
If additional tax
• 30 day letter
• Pay or appeal within IRS
Penalties and Interest
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Failure to file: 5% per month of tax not
paid up to 25%
Failure to pay: ½% per month of tax not
paid up to 25%
Substantial underpayment: 20% of tax
not paid
Interest: T-Bills plus 3% on tax not paid