Chapter 01 - Introduction to Taxation, the Income Tax Formula, and Form 1040EZ

CHAPTER 1 INTRODUCTION TO TAXATION, THE INCOME TAX FORMULA, AND FORM 1040EZ
Discussion Questions 1. Give a brief history of the income tax in the United States. Answer: The first federal income tax was enacted in 1861 to help finance the Civil War and was discarded soon thereafter. In 1894, another income tax was promulgated by Congress to raise additional tax revenue and to expand the sources of revenue. In 1895, the Supreme Court ruled that the federal income tax was unconstitutional. In 1913, the sixteenth Amendment to the U.S. Constitution was enacted. This amendment gave Congress the power to levy and collect taxes. In 2004, the federal government collected $832 billion in individual income taxes. 2. For tax year 2004, what proportions of individual income tax returns were filed on a Form 1040EZ, Form 1040A and Form 1040? What proportion were electronically filed? Answer: In 2004, 61% of individual income tax returns were filed using a Form 1040, 23% using a Form 1040A, and 16% using a Form 1040EZ. About 51.7% of all tax returns were filed electronically. 3. Name the three types of tax rate structures and give an example of each. Answer: Progressive – U.S. federal income tax Proportional – “flat-tax” usually leveled on property or sales at the state or local level Regressive – Social Security Tax

1-1

Chapter 01 - Introduction to Taxation, the Income Tax Formula, and Form 1040EZ

4. What is meant by a progressive tax? Why do you think the government believes it is a more equitable tax than, say, the regressive tax or proportional tax? Answer: A progressive rate structure is a rate structure where the tax rate increases as the tax base increases. The progressive rate structure is viewed as more equitable because the amount of tax paid varies with the ability to pay. For example, the government believes that as an individual makes more income, a smaller percentage of that income is needed to buy necessary living supplies and thus more income is available to pay taxes. 5. What type of tax is a sales tax? Explain your answer. Answer: The sales tax is a proportional tax. A proportional tax is a tax where the tax rate remains at the same rate regardless of the tax base. Most county or state sales taxes are the same regardless of the amount of sales upon which the tax is levied. With a proportional tax, the marginal tax rate and average tax rate are always the same. 6. What is the definition of tax base and how does it affect the amount of tax that is levied? Answer: The tax base is the dollar amount upon which the tax rate is applied in order to determine the actual tax. Income, dollar sales, and property value are the more common tax bases in the United States. 7. What type of tax is the U.S. federal income tax? Explain your answer. Answer: The federal income tax is a progressive tax. As the tax base increases, the rate of tax increases. Tax rates range from a low of 10% to a high of 35%.

1-2

sick pay. etc.500 of wages (in 2007). The social security tax is assessed on the first $97.000 have average tax rates greater than 17% and those with taxable income below $100. Define and compare these terms: average tax rate and marginal tax rate. fringe benefits. those with taxable incomes under $100. A change to a 17% flat tax could cause a considerable increase in many taxpayers’ taxes and a considerable decrease in the case of others. 9. 1-3 . if a 17% flat tax were enacted.4% if self-employed) on the first $97.Chapter 01 . Thus.000 have average tax rates less than 17%. the Income Tax Formula.000 would see their tax liability go up and those with taxable incomes over $100. Answer: Those with taxable incomes above $100. The social security tax is considered a regressive tax. The marginal tax rate is the tax rate applied to the last dollar of income. What is meant by “compensation for services?” Give some examples. and Form 1040EZ 8. commissions.Introduction to Taxation. Explain what is meant by regressive tax.500. bonuses.2% (12. Examples are: wages. 11. the social security tax rate is 6.000 would have lower tax liability. the average tax rate is always the same as or is lower than the marginal tax rate. Why? Answer: A regressive tax rate is one where the tax rate decreases as the tax base gets larger. Thus. In a progressive rate structure. Answer: The average tax rate is the total tax liability divided by the taxable income (or tax base). 10. Explain this statement in light of the statistics in Table 1-3 of the text. salaries. Answer: Compensation for services is the broad category used by the IRS to encompass all forms of economic benefit a taxpayer may receive as a result of an employee/employer arrangement.500 of wages and 0% on wages above $97. tips.

Explain why unemployment compensation is taxable.500 if their filing status is married. 13. installment sales). wages are reported to taxpayers on a W-2 form and interest is reported on a Form 1099-INT. The compensation is. the Income Tax Formula. tax payments. Thus. judgments. Answer: Unemployment compensation is paid to an individual as a result of that person becoming unemployed. What is the definition of “interest?” Answer: Interest is compensation for the “use of money” with respect to a bona fide debt or obligation imposed by law (e..Introduction to Taxation. and Form 1040EZ 12. 16. What federal tax forms do taxpayers normally receive to inform them of the amount of wages and interest they earned during the year? Answer: Normally. taxpayers can take a permitted deduction on line 5 of $8. 14. What is the amount of the permitted deduction for single and married taxpayers who use the Form 1040EZ? Answer: On Form 1040EZ. it is taxable just as wages are taxable. 1-4 .g.750 if the taxpayer’s filing status is single or $17. a substitute for taxable wages. in effect.Chapter 01 . What is the most common way taxpayers pay their income tax liability during the year? Answer: The vast majority of taxpayers pay their annual tax liability through income tax withholdings deducted their paychecks by their employer and remitted to the government on the behalf of the taxpayer. 15.

000 and paid $1. Recessive Answer: b 1-5 .000 and paid $4. Progressive b. Regressive d.000 and paid $3. Proportional c. Progressive b. The tax rate structure they are subject to is: a. Regressive d. A tax rate that decreases as the tax base decreases is an example of what kind of tax rate structure? a. Mike earned $40. Regressive d. The tax rate structure they are subject to is: a. Proportional c. Proportional c. Jake earned $15. Progressive b.000 of income tax. Regressive d. Recessive Answer: c 18. Jill earned $40.Chapter 01 .000 of income tax. the Income Tax Formula. Margaret earned $15. Progressive b. Recessive Answer: a.500 of income tax. Proportional c.Introduction to Taxation. 19. and Form 1040EZ Multiple Choice 17. Recessive Answer: c 20. A tax rate that decreases as the tax base increases is an example of what kind of tax rate structure? a.500 of income tax.000 and paid $1.

50 1. 25% d.565.700 − $15. Which of the following is an example of a progressive tax? a.00 7.650) × 15% = ($68.25 ======== 1-6 .650 × 10% = ($63. Jennifer and Paul have taxable income of $68.700) × 25% = Total tax liability Their marginal tax rate is: a. and Form 1040EZ 21. 14.Chapter 01 . Federal income tax b.881.135 − $63. the Income Tax Formula. Social Security taxes Answer: d 22.5% Answer: c $ 1.207. Sales tax d.108. Social Security taxes Answer: a 23. Federal income tax b. Which of the following is an example of a regressive tax? a.135 and the following tax liability: $15. State and local taxes levied on property c. Sales tax d. 10% b. State and local taxes levied on property c.75 ------------$ 9. 15% c.Introduction to Taxation.

The taxpayer was age 66. 1099-G c.000.5% Answer: d 25. 14.700) × 25% = Total tax liability Their average tax rate is: a. 1099-INT Answer: a $ 1. Jennifer and Paul have taxable income of $68. d.650 × 10% = ($63. 10% b.135 and the following tax liability: $15. 1040A c.00 7.565.25 ======== 1-7 . Wage income is reported to a taxpayer on a Form a.50 1. 1040 b. the Income Tax Formula.207. 1040 Simple Answer: a 27.108.135 − $63. Answer: b. The taxpayer is married b. The taxpayer received unemployment compensation. 26. 1099-W d. The taxpayer had adjusted gross income (line 4 of Form 1040EZ) of $101.881. W-2 b.650) × 15% = ($68. The most complex individual income tax return is a Form a. 1040EZ d.Introduction to Taxation. Which of the following would disqualify a taxpayer from filing a Form 1040EZ? a.700 − $15. 25% d.Chapter 01 .75 ------------$ 9. 15% c. c. and Form 1040EZ 24.

Chapter 01 .835 Answer: c 1-8 . $19.250 Answer: c 30. Using the tax tables.750 c.500 d. $26. tax due of $3.500 b. Her employer withheld $3. the Income Tax Formula. 1099-G c.942 Answer: c 31. and Form 1040EZ 28. Elizabeth’s tax return would show a.942.492 c.Introduction to Taxation. Sandra. 1099-UN d. Unemployment compensation income is reported to a taxpayer on a Form a. $18. $8. W-2 b. $14. Elizabeth determined her tax liability was $3. $16. a refund of $450 b. $1. 1099-INT Answer: b 29. a refund of $3.579 b. a single taxpayer.937. On a Form 1040EZ.450 d. $17.906 c. the amount of the permitted deduction from income for taxpayers filing a joint return is: a. her tax liability is: a. has taxable income of $86. tax due of $450 d.492 from her paychecks during the year.

Chapter 01 . Tax liability determined using the tax tables will be less than tax liability determined using the tax rate schedules.Introduction to Taxation. You have calculated tax liability using the tax tables and using the tax rate schedules. Answer: b 33. $16. $15. The answer cannot be determined with the information provided. What can you say about the two figures? a. d.319 b. 34. How much income tax did their employers withhold during the year? a.855 c. $11. $4. Arno and Bridgette are married and have combined W-2 income of $93.381. has W-2 income of $42. $4.455. $12. Tax liability determined using the tax tables will be the same as tax liability determined using the tax rate schedules. $5.043 Answer: b. $7. Eddie.363 c. and Form 1040EZ 32. his tax liability is: a. Using the tax tables.589 d.487.276 b.940 c. A married taxpayer has taxable income of $77. b. c. They received a refund of $522 when they filed their taxes. a single taxpayer.738 Answer: b 1-9 . Tax liability determined using the tax tables will be more than tax liability determined using the tax rate schedules. the Income Tax Formula.

000 to under $200.391.021.645.000 range = $37.166.000 or more range = $388.000 to under $50.735. Under $15.569 = $17.065.000 range = $559.512.208.000 to under $50. Using the information in Table 1-3.000 range = $962.573 $100.641 = $6. Answer: In each case. the average taxable income per return is calculated by dividing total taxable income by the number of tax returns.560.000 / 24.000 / 9.000 range = $178.788.595 = $806 $30. the Income Tax Formula.000 / 29.569 = $98.000 / 9.002 $15.537 $50. Answer: In each case.486.000 range = $62.000 / 29.819 $30.996 $200. Using the information in Table 1-3.166.520.316.000 to under $30.316.551.339.498.745.855 $50.831 36.000 to under $30.802. for each of the ranges of taxable income provided.128.895 $200.000 / 37.862 = $22.000 to under $200.533.000 range = $175.000 range = $3.Chapter 01 . and Form 1040EZ Problems 35.338 $100. Remember that the taxable income is shown in thousands so you need to add three zeros to the taxable income number provided.000 / 3.602.862 = $2.000 range = $260.156.000 range = $23. the average tax liability per return is calculated by dividing the total tax liability by the number of tax returns. determine the average amount of taxable income per tax return. for each income range provided.436 = $499.962. in dollars.641 = $47.995.735. determine the amount of average tax liability per tax return.463.510.000 / 24. Under $15. in dollars.000 / 3. Remember that the total tax liability is shown in thousands so you need to add three zeros to the tax liability number provided.436 = $128.410.Introduction to Taxation.940 = $82 $15.000 to under $100.000 range = $1.185.486.000 to under $100.205.940 = $1.498.021.032.186.000 / 28.480.000 / 28.000 or more range = $1.595 = $8.745 1-10 .000 / 37.

17 -----------------------$ 793.208.788.000 23.339.696.928.533. 1-11 . Note. and Form 1040EZ 37.165.185.000 1.205.000 388.670.000 X .065. instituting a 17% flat tax on the same tax base would mean lower tax revenue of about $38 billion.560.745.156.410.000 962.208. Thus.480.186.602.000 1.391.645. that the distribution of that liability would be significantly different across the income ranges presented.512.802.551.962.000 ============= A 17% flat tax would raise about $794 billion of tax revenue compared to $832 billion of actual tax revenue. How does this amount differ from the actual liability? Answer: The tax liability assuming a 17% flat rate is calculated by adding up the taxable income for all income ranges and multiplying it by 17%.128. the Income Tax Formula.000 62.000 175.Chapter 01 .Introduction to Taxation.331.463.510. Total taxable income: $ 37.935.000 -----------------------$4.000 ----------------------$ 831.950 ============== Compare that number with the total tax liability on Table 1-3: $ 3. however.032.995.000 178.000 559. If the federal tax system was changed to a proportional tax rate structure with a tax rate of 17%. Use the information in Table 1-3. calculate the amount of tax liability for 2004 for all taxpayers.000 260.520.

• have no dependents. and • claim no tax credits except for the Earned Income Credit. the Income Tax Formula. the income tax formula is: Income − Permitted Deductions from Income -------------------------------= Taxable Income × Appropriate Tax Rates -------------------------------= Tax Liability − Tax Payments and Tax Credits --------------------------------= Tax Refund or Tax Due with Return 39. In its most simplified form. • have total taxable income under $100.Chapter 01 . and Form 1040EZ 38. What six criteria must a taxpayer meet in order to file a Form 1040EZ? Answer: In order to use a 1040EZ. • be under age 65.000. a taxpayer must meet the following criteria: • file the return as either single or married. 1-12 .500. • have taxable interest income less than $1. What is the Income Tax Formula? Answer: The income tax formula is the methodology used to determine the amount of tax owed by a taxpayer.Introduction to Taxation.

41. Why might a taxpayer pay too much during the year? Answer: When a tax return is filed.030.034. There is a difference between the two amounts because the tax tables are based on taxable income at the midpoint of the range. the tax tables are based on a taxable income of $42. and Form 1040EZ 40. His tax using the tax rate schedules is $7. Determine his tax liability using the Tax Tables and using the Tax Rate Schedule. the Income Tax Formula.50. Thus. Why is there a difference between the two amounts? Answer: Cameron’s tax using the tax tables is $7.Chapter 01 . they will either pay an additional amount or receive a refund of excess taxes paid. Sometimes taxpayers choose to pay “too much” as a method of forced savings.443. These withholdings (or other payments) are an estimate of the total tax liability that will be due at the end of the year.Introduction to Taxation.425 while the tax rate schedules are based on taxable income of $42. When taxpayers file a tax return.443. Cameron is single and has taxable income of $42. during the year. There will almost always be a difference between the actual amount due and the amount estimated. A taxpayer will pay too much during the year if he or she estimates a higher tax liability than is actually due. the taxpayer determines the total amount of tax liability. Briefly explain how this “settling up” process works. taxpayers pay this liability to the government through income tax withholdings. Normally. The amount due or overpaid is determined when the final tax return is filed. 1-13 .

Answer: Their taxable income is $47. Answer: a. a.335. taxable income of $47.690. Determine the tax liability.335. taxable income of $36.299. Liability = $6. taxable income of $21. What are their taxable income and their tax liability.4% 1-14 .860 marginal = 15% average = 13.493 marginal = 25% average = 15. b. Married taxpayers.469 marginal = 15% average = 11. taxable income of $36. Single taxpayer. Use the Form 1040EZ Tax Tables to determine tax liability.659 marginal = 15% average = 12. Single taxpayer. and average tax rate in each of the following cases. Remember that you need to subtract the permitted deduction of $17. and average tax rate in each of the following cases. Determine tax liability using the Tax Tables and the Tax Rate Schedule. Havel and Petra are married.1% 44. Liability = $2. taxable income of $21. marginal tax rate. and Form 1040EZ 42. Their tax liability using the tax tables is $6.8% b.4% b. taxable income of $47. Liability = $8. Use the Form 1040EZ Tax Tables to determine tax liability.301 and their liability using the tax rate schedules is $6. Liability = $2. Liability = $5.288.288. the Income Tax Formula. b. 43.214. Liability = $4. Determine the tax liability.Chapter 01 .690.783. Answer: a. marginal tax rate. marginal tax rate.2% b. and average tax rate in each of the following cases. b. and meet the requirements to file a Form 1040EZ. Married taxpayers. Answer: a. will file a joint tax return.3% 45. Havel has W-2 income of $31.60.316 marginal = 15% average = 13. Single taxpayer. Use the Form 1040EZ Tax Tables to determine tax liability.500 from their W-2 wages to obtain taxable income. Married taxpayers.931 and Petra has W-2 income of $32. a. a.Introduction to Taxation.255 marginal = 25% average = 17. Determine the tax liability.

139.054. If Betty and Ronald use a filing status of married filing jointly.750. Her employer withheld $13.75 Liability for 44b = $6. 49. 1-15 . To determine taxable income (the number necessary to use the tax tables) you need to subtract the permitted deduction of $8.405.500. was $67.561.274 .$12.Introduction to Taxation. above.257. To determine taxable income (the number necessary to use the tax tables) you need to subtract the permitted deduction of $17. and 45. Their taxable income is $45.Chapter 01 . determine their tax liability. Sheniqua.75 Liability for 45b = $8.25 Liability for 44a = $4. Using the tax tables. Answer: Their tax liability is $6.50 47. The W-2 income of Betty and her husband Ronald were $32.00 Liability for 43b = $5. Sheniqua has overpaid by $869 ($13. Her employer withheld $13.914. 48. The problem tells you Sandra’s W-2 income. The problem tells you Betty and Ronald’s W-2 income. Using the tax tables.862. would Sheniqua receive a refund or would she be required to pay additional tax? What is the amount? Answer: Sheniqua’s tax liability is $12. respectively. The W-2 income of Sandra.274 in federal income taxes from her paychecks throughout the year.443. determine Sandra’s tax liability.471. had taxable income of $63.495.093.405) so she is entitled to a refund of that amount.317. Answer: Sandra’s tax liability is $11.70 Liability for 45a = $2.693.660.922 and $30. the Income Tax Formula. Answer: Liability for 43a = $2. a single taxpayer. a single taxpayer. and Form 1040EZ 46. Sandra’s taxable income is $58.274 from her paychecks. 44. Use the Tax Rate Schedules to determine tax liability for each of the cases in problems 43.

117 – $12.366. Using the tax tables. determine the amount of refund or additional tax due upon filing their tax return.500. judicial decisions. They will file their tax return married filing jointly. not their taxable income. What are the three types of tax authority? Who issues each type? Answer: Statutory Authority – issued by Congress Administrative Authority – issued by the IRS Judicial – issued by the various courts in the U.Chapter 01 . Discuss the concept of “tax authority.811 ($14. They had a total of $14. regulations. Answer: The problem tells you Xavier and Maria’s W-2 income.117 withheld from their paychecks for federal income tax purposes. Since they had $14. the Income Tax Formula. 52.117 withheld they are entitled to a refund of $1. and other items that provide taxpayers and tax professionals with guidance to correctly report taxable income.” How does tax authority help taxpayers and tax preparers report tax items properly? Answer: Tax authority represents to body of law.058 giving them tax liability of $12. judicial system 1-16 . Xavier and his wife Maria have total W-2 income of $95. Questions Pertaining to Appendix A 51.366).558. Indicate whether the amount is a refund or additional tax. To determine taxable income (the number necessary to use the tax tables) you need to subtract the permitted deduction of $17.Introduction to Taxation.S. Their taxable income is $78. and Form 1040EZ 50.

Introduction to Taxation. Joint Conference Committee). Other types of authority are necessary because statutory authority is often broad and lacks the detail to answer questions concerning the proper reporting of many different tax transactions. Why? Answer: The Joint Conference Committee is composed of members of the House Ways & Means Committee and the Senate Finance Committee. Discuss the concept of statutory tax authority. The purpose of the joint committee is to resolve any conflicts between the two versions. 1-17 . The administrative and judicial authorities provide interpretations of the Congressional intent by both the IRS and the courts. 56. a report is produced for that committee. It is formed when the House and the Senate have passed different versions of a tax bill. What is the legislative process concerning tax laws? Where does tax legislation often begin? Answer: The legislative process is shown in table 1-4. The committee reports are especially useful to taxpayers and professionals because they provide guidance when a new tax law is passed or when there is minimal administrative or judicial authority to help interpret the law. The committee reports set forth the “intent of Congress” as the tax legislation is written. The IRC is written by Congress and is considered the tax law. Why is there a need for additional types of authority when statutory authority is the law? Answer: The most common statutory tax authority is the Internal Revenue Code (IRC). 55. and Form 1040EZ 53. Senate Finance Committee. 54. the Income Tax Formula. What are committee reports and how can they help the taxpayer or tax preparer? Answer: When a tax bill is discussed and voted on by the various congressional committees (Ways and Means. Thus. Tax legislation usually begins in the Ways and Means Committee of the House of Representatives. the committee reports from the Joint Conference Committee are the last reports and contain the discussion of the intent regarding the final bill sent to the President for signature. What is the purpose of the Joint Conference Committee? Its reports are considered more important or carry weight that is more authoritative.Chapter 01 .

It is effective as soon as it is issued and expires three years from the date of issuance. All legislation passed by Congress and signed into law follows this numbering system – whether it is a tax bill or otherwise. proposed regulations do not have the effect of law so the tentative position may be overturned. However. A temporary regulation has the same tax authority as a general or final regulation. 58. Answer: Public Law 100-14 is the 14th bill of the 100th Congress that was signed into law. What is administrative authority and who publishes it? Answer: Administrative authority is the IRS’s interpretation of the IRC. Can a taxpayer rely on a Temporary Regulation as authority on the way to treat a certain tax item? If so. The purpose of proposed regulations is to generate discussion and/or criticism of the IRS’s interpretation of the IRC. the Income Tax Formula. 59. It is developed and published by the IRS. The taxpayer can rely on a proposed regulation absent any other contradictory tax authority. What is meant by a Proposed Regulation? Can a taxpayer rely on a Proposed Regulation as authority on the way to treat a certain tax item? Answer: The IRS writes proposed regulations during the hearing process leading up to the issuance of final or general regulations.Chapter 01 . 60. how long is a Temporary Regulation valid? Answer: Taxpayers can rely on temporary regulations. Explain what is meant by Public Law 100-14. 1-18 . Reliance on a proposed regulation is treated as authority for negligence penalty purposes (the reversed tax position would not be subject to a negligence penalty).Introduction to Taxation. and Form 1040EZ 57.

the second advantage can also be a disadvantage if the tax authority is not on the taxpayer’s side as might be the case if emotional or undue circumstances caused the deficiency.gov and other locations.Chapter 01 .S. and Form 1040EZ 61.irs. Revenue Rulings are most useful to taxpayer in determining the proper tax position to use regarding a given fact scenario. rates. 63.g. tax depreciation tables). Where are Revenue Rulings and Revenue Procedures found? When might a Revenue Ruling be useful to a taxpayer? When might a Revenue Procedure be useful to a taxpayer? Answer: The IRS publishes all Revenue Rulings and Procedures in a series called the Cumulative Bulletin. Which one is the stronger tax authority? Answer: The IRS writes general regulations to interpret the IRC under the general authority given to the IRS by Congress. What are the advantages in petitioning the Tax Court verses other trial-level courts? Answer: The major advantage of filing a case with the Tax Court is that the taxpayer need not pay the amount of disputed tax before filing a petition. the Income Tax Formula. In what courts are disputes between the IRS and a taxpayer heard? Answer: The three trial courts that hear tax disputes between the IRS and taxpayers are the U. Another advantage is that the Tax Court justices are tax law specialists. 64. 62. District Courts. 1-19 .Introduction to Taxation. Rulings and Procedures can also be located on the Web at www. and U. Legislative regulations have the full effect of law and are the strongest administrative authority. Revenue Procedures are used more often to provide resources such as tables. A legislative regulation is a regulation written by the IRS under a direct mandate by Congress.S. However. guidelines.S. and safeguards (e. the U. Congress tells (or gives power to) the IRS to write the actual law through a legislative regulation.. In other words. Differentiate between a General Regulation and a Legislative Regulation. Court of Federal Claims. Tax Court.

The only tax cases the Supreme Court usually agrees to rule on are cases where a conflict occurs between the rulings of several different courts. the Income Tax Formula. a decision by a jury may produce a more positive outcome.S. If a taxpayer loses a case against the IRS in one of the three trial courts. does the taxpayer have any avenue for appeals? Answer: Any of the trial court’s decisions may be appealed to the U. 68. Court of Appeals. and Form 1040EZ 65. if the taxpayer’s case is an emotional issue but the tax law is against his or her position. does the taxpayer have any additional avenue for appeals? If so. the tax authority is weighted more heavily and emotional reasons for a verdict are more likely to be disregarded. the Supreme Court hears few tax cases each year. Supreme Court. After the court of appeals. District Court allows jury trial. 67. When would a taxpayer want to sue the government in a district court verses the Tax Court? Answer: A U.S. 1-20 . Therefore.Introduction to Taxation. Upon appeal.Chapter 01 . what are the taxpayer’s probabilities of receiving an appeal after the court of appeals? Why? Answer: All of the court of appeals cases can be appealed to the U. A judge who is a tax specialist decides Tax Court cases. Why might a district court’s opinion regarding a tax decision be more likely to be reversed on appeal? Answer: A District Court ruling may be decided by a jury or by a judge that is not a tax specialist. 66.S. However.

When a tax professional is researching a tax issue. court cases. They expire three years after they are issued. Revenue Ruling and Procedure carry less authoritative weight than regulations and statutory authority. 1-21 . and Form 1040EZ 69. Temporary Regulations – The IRS issues these regulations to give taxpayers immediate guidance on the effect of a new law. the Income Tax Formula. Proposed Regulations – The IRS writes these regulations during the hearing process concerning general regulations. The four types of regulations are: Legislative – written under a direct mandate from Congress that have the full effect of law.) as part of the justification for the IRS position. General or Final Regulations – Written by the IRS under its general authority to interpret the IRC. etc. However. A treasury regulation is the strongest administrative authority and is the IRS’s direct interpretation of the IRC. What is the difference between a Revenue Ruling and a Revenue Procedure? How does the level of authority of a ruling or procedure compare with regulations and statutory authority? Answer: With a Revenue Ruling. The IRS usually issues Revenue Procedures to illustrate the manner in which they want something reported. What is a Treasury Regulation? What are the four types of regulations and how do they differ? Answer: A Treasury Regulation is written by the IRS (the IRS is a division of the U. Rulings and Procedures are an especially useful source of information because they reference other tax authorities (law.Chapter 01 . a Revenue Procedure is usually proactive. In other words.S. the IRS reacts to an area of the tax law that is confusing to many taxpayers. Treasury Department). 70. The purpose of these regulations is to generate discussion and/or criticism of the IRS’s interpretation of the IRC.Introduction to Taxation. they are considered strong tax authority. Revenue Rulings are usually issued after numerous taxpayers have requested guidance through Private Letter Rulings on a particular tax situation.

General or Final Regulations b. Reg. Revenue Rulings. the Income Tax Formula. §20. Reg. §31. §25. Legislative Regulations c. Temporary Regulations Answer: b 74. Regulations. c. §1. Answer: d 72. Which of the following are primary sources of tax authority? a.162-5. Internal Revenue Code. and Form 1040EZ Multiple Choice Questions Pertaining to Appendix A 71. c.2503-4. Proposed Regulations d. Reg. Tax Court decision. c. Judicial sources. d. Administrative sources. Which of the following types of IRS Regulations have the greatest strength of authority? a.Chapter 01 . Which of the following refers to an income tax regulation? a.2032-1.Introduction to Taxation.3301-1. All of the above. Statutory sources. b. Answer: a 1-22 . Answer: a 73. Which of the following is a statutory source of tax authority? a. b. Reg. d. b. d.

S. The other Form 1099-INT was from Baystate Savings and Loan and showed $281. She worked the entire year for Applebee Consulting.800. you will need a Form 1040EZ for each problem. Tax Return Problem #1 Brenda Peterson is single and lives at 567 East Street. MA. Her Form W-2 contained information in the following boxes: Wages (Box 1) = $61. the Income Tax Formula. c. and Form 1040EZ 75. All of the above.292.12 Social Security Wages (Box 3) = $61. Tax Court.70 in box 1. U. d.Introduction to Taxation. If you are manually preparing the tax returns.292.73 She also received two Form 1099-INT’s. U. U. One was from First National Bank of Beantown and showed $537. Which of the following trial courts hear tax cases? a.851. 1-23 . Prepare a Form 1040EZ for Brenda. district courts. b. Her SSN is 33344-5555.39 in box 1.292.05 Withholding Box 2 = $ 9.Chapter 01 .05 Social Security W/H (Box 4) = $ 3.S. Court of Federal Claims.10 Medicare Wages (Box 5) = $61. Beantown.S. Answer: d Tax Return Problems Use your tax software to complete the following problems.05 Medicare W/H (Box 6) = $ 888.

27 Medicare W/H (Box 6) = $ 525.Chapter 01 .246. and Form 1040EZ Tax Return Problem #2 Jin Xiang is single and lives at 2468 North Lake Road in Lakeland. Jin worked at Parts-Galore.Introduction to Taxation.167. a local auto parts store.39 Social Security Wages (Box 3) = $ 9.239. The Form W-2 from Parts-Galore contained information in the following boxes: Wages (Box 1) = $ 9.911. MN.02 Medicare W/H (Box 6) = $ 132.27 Federal W/H (Box 2) = $ 3. She worked the entire year for Lakeland Automotive. 1-24 . Her SSN is 444-55-6666.47 On the weekends.92.167.83 Medicare Wages (Box 5) = $36.27 Social Security W/H (Box 4) = $ 2. Prepare a Form 1040EZ for Jin. The amount in box 1 of the Form 1099-INT was $51.36 Medicare Wages (Box 5) = $ 9.167.92 Jin also received a Form 1099-INT from Minnesota Savings and Loan. The Form W-2 from Lakeland contained information in the following boxes: Wages (Box 1) = $36.239.239. the Income Tax Formula.02 Social Security W/H (Box 4) = $ 568.02 Federal W/H (Box 2) = $ 348.80 Social Security Wages (Box 3) = $36.

05 Medicare W/H (Box 6) = $ 750.820.820. 1-25 .20 Federal W/H (Box 2) = $ 2. and Form 1040EZ Tax Return Problem #3 Jose and Maria Suarez are married and live at 9876 Main Street.05 Social Security W/H (Box 4) = $ 3.408. Jose was employed by First Mountain Bank. The Form W-2 Maria received from Blue Sky contained information in the following boxes: Wages (Box 1) = $51.14 Social Security Wages (Box 3) = $19. Jose was employed by Mountain Mortgage Company.20 Medicare W/H (Box 6) = $ 287.39 Maria was employed the entire year by Blue Sky Properties. Jose’s SSN is 555-66-7777 and Maria’s SSN is 666-77-8888. The Form 1099-G Jose received from the State of Colorado contained $1.51 Medicare W/H (Box 6) = $ 464.21 Medicare Wages (Box 5) = $32.06 The Suarez’s also received two Form 1099-INT showing interest they received on two savings accounts.397.14 Medicare Wages (Box 5) = $51.228.728. Prepare a Form 1040EZ for Jose and Maria Suarez. For the first five months of the year.019.05 Federal W/H (Box 2) = $ 6.985. the Income Tax Formula.822. The Form W-2 Jose received from the bank contained information in the following boxes: Wages (Box 1) = $19.207. The other Form 1099-INT from Second National Bank of Northwestern Denver showed $82.728.51 Federal W/H (Box 2) = $ 4. CO.51 Social Security W/H (Box 4) = $ 1.000 of unemployment insurance payments.000 in box 1 and $75 in box 4.820.89 Social Security Wages (Box 3) = $32. The last four months of the year.019. The Form W-2 from Mountain Mortgage contained information in the following boxes: Wages (Box 1) = $32.36 in box 1.28 Jose was laid off from his job at Mountain Mortgage and was unemployed for three months. He received $1.Introduction to Taxation.82 Social Security Wages (Box 3) = $51.Chapter 01 .019.85 Medicare Wages (Box 5) = $19.20 Social Security W/H (Box 4) = $ 1.728. One Form 1099-INT from the First National Bank of Northeastern Denver showed $59. Denver.45 in box 1.

Sign up to vote on this title
UsefulNot useful