C237 - Taxation PSYCHIA-P1-EXAM - PRINT-WITH-ANSWERS EXAM QUESTIONS WITH CORRECT ANSWERS Taxation

C237 - Taxation PSYCHIA-P1-EXAM -
PRINT-WITH-ANSWERS EXAM QUESTIONS
WITH CORRECT ANSWERS Taxation




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, TOPIC 1: GENERAL TAX SYSTEM INFORMATION
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• 1913 – income tax created as the 16th amendment (restructured in 1986)
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• Tax rate – level of taxes, expressed as a percentage
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• Tax base – what is actually being taxed
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• Marginal tax rate – the rate that applies to the next increment of taxable income
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o This is a graduated system (income tax) jl jl jl jl jl jl


• Average tax rate – the taxpayer’s average level of tax on each dollar of taxable income
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• Effective tax rate – the taxpayer’s average level of tax on each dollar of total income
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o Both taxable and nontaxable income jl jl jl jl


• Proportional tax rate (flat tax) – constant rate throughout tax base jl jl jl jl jl jl jl jl jl jl


o Sales tax and excise tax jl jl jl jl



• Progressive tax rate – imposes and increasing marginal rate as the base increases jl jl jl jl jl jl jl jl jl jl jl jl


o Income tax jl


• Regressive tax rate – imposes a decreasing marginal rate as the base increases
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o Social security and Unemployment tax jl jl jl jl


• OASDI (social security) tax rate it 6.2% for employee and employer
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o If self-employed, you pay the entire 12.4% jl jl jl jl jl jl


• Medicare tax is 1.45% for employee and employer jl jl jl jl jl jl jl


o If self-employed, you pay the entire 2.9% jl jl jl jl jl jl


• Total tax rate for self-employed is then 15.3%
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• Criteria used for evaluating a tax system:
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o Sufficiency – taxes generate enough revenue to cover government expenses jl jl jl jl jl jl jl jl jl


o Equity – fairness, spread of burden across taxpayers jl jl jl jl jl jl jl


o Certainty – taxpayer knows, when, how much, and where to pay tax jl jl jl jl jl jl jl jl jl jl jl


o Convenience – it’s easy to pay jl jl jl jl jl


o Economy – minimize admin cost associated with the tax system jl jl jl jl jl jl jl jl jl



• Tax return due dates:
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o Individuals – 15th day of 4th month (April 15th) jl jl jl jl jl jl jl jl


o C corps – 15th day of 4th month following end of tax year
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o Partnerships and S corps – 15th day of 3rd month following end of tax year jl jl jl jl jl jl jl jl jl jl jl jl jl jl


• Statute of limitations is the period of time a payer can file an amended return, or the IRS can ass
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ess a tax deficiency for a specific year
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o 3-year general statute jl jl


o 6 years if omitted an amount greater than 25% of reported gross income
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o No limit for fraudulent returns or non-filing jl jl jl jl jl jl


o The clock starts on the tax due date or when you actually filed if you filed late
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• Three types of audits: jl jl jl


o Correspondence examinations – limited to 1-2 items, request for supporting docs jl jl jl jl jl jl jl jl jl jl


o Office exams – conducted in local IRS office, broader in scope jl jl jl jl jl jl jl jl jl jl


o Field exams – held at taxpayers’ business and can last from months to years jl jl jl jl jl jl jl jl jl jl jl jl jl



• Can contest results of an audit at the following:
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o US tax court – do not have to pay tax first, up against tax experts jl jl jl jl jl jl jl jl jl jl jl jl jl jl


o US district or federal courts – must pay amount owed before trial and fight for refund
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