Tax Law & Compliance Flashcards

Which U.S. government agency is responsible for tax collection and enforcement?

Answer: IRS

The Internal Revenue Service (IRS) is the U.S. federal government agency primarily responsible for collecting taxes and administering the Internal Revenue Code. Its duties include processing tax returns, enforcing tax laws, and providing taxpayer services. The IRS plays a crucial role in funding government operations through its tax collection efforts.

What is the deadline for filing individual federal tax returns in the U.S.?

Answer: April 15

For most individual taxpayers in the U.S., the standard deadline for filing federal income tax returns and paying any taxes owed is April 15th of the year following the tax year. If April 15th falls on a weekend or holiday, the deadline is typically shifted to the next business day. While extensions can be requested, they only extend the filing deadline, not the payment deadline.

Which form is used to report self-employment income?

Answer: Schedule C

Schedule C (Form 1040), titled 'Profit or Loss from Business,' is the specific tax form used by sole proprietors and single-member LLCs to report their income and expenses from a business or profession. This form calculates the net profit or loss from self-employment, which then flows to the individual's personal Form 1040. It is essential for accurately reporting self-employment earnings.

What is the consequence of willfully failing to file a tax return?

Answer: Possible criminal charges

Willfully failing to file a tax return is a serious offense with consequences far beyond just monetary penalties. The IRS and Department of Justice can pursue criminal charges against individuals who intentionally avoid their filing obligations. This can result in substantial fines, imprisonment, or both, highlighting the legal imperative for all eligible individuals to file their tax returns.

What is considered taxable income?

Answer: Most earned and unearned income

Taxable income broadly includes almost all income from any source, unless specifically excluded by law. This encompasses both earned income, such as wages and salaries, and unearned income, like interest, dividends, and rental income. The IRS's definition is comprehensive to ensure most financial gains are subject to taxation.

Which form reports interest income?

Answer: Form 1099-INT

Form 1099-INT is the specific tax document issued by financial institutions to report interest income paid to individuals during the tax year. This form is crucial for taxpayers to accurately report their unearned income to the IRS. Other forms like W-2 are for wages, and Schedule SE is for self-employment tax.

What is the purpose of tax withholding from employee paychecks?

Answer: To prepay tax liability

Tax withholding from employee paychecks serves as a mechanism to prepay an individual's annual income tax liability. Employers deduct an estimated amount of tax from each paycheck and send it to the government. This system helps employees avoid a large tax bill at year-end and provides the government with a steady revenue stream.

What is a common reason for a tax return audit?

Answer: Inconsistent or unusual income

The IRS often flags tax returns for audit when there are significant inconsistencies or unusual patterns in reported income or deductions compared to prior years or industry averages. Discrepancies between reported income and third-party information, such as W-2s or 1099s, can also trigger an audit. These anomalies suggest potential errors or misreporting that warrant further examination.

What is the standard penalty for failing to file a tax return on time?

Answer: 5% per month up to 25%

The standard penalty for failing to file a tax return on time is 5% of the unpaid taxes for each month or part of a month that the return is late. This penalty is capped at a maximum of 25% of your unpaid taxes. It's important to note that this 'failure to file' penalty is separate from the 'failure to pay' penalty.