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Income Tax Timing
Terms in this set (11)
Annual Accounting Period Concept
taxpayers must report on annual basis and each taxable year stands on its own, apart from other tax years.
Congruence with Books requirement
taxable income computed under method which taxpayer regularly computes his income in keeping his books
usually met if can reconcile book method and tax method
Clear Reflection of Income
If no method of accounting has been regularly used
if method used doesnt clearly reflect income then computation of taxable income will be made in method chosen by the secretary
In order to CLEARLY REFLECT INCOME, method must:
1. be CONSISTENTLY applied
2. comport with IRC and underlying authorities
if method does not clearly reflect income,
IRS sets method, which courts will review using abuse of discretion standard
Taxpayer's method of accounting doesnt have to be
"best" method of accounting, just must clearly reflect income
Conformance with GAAP
not necessarily acceptable for tax because
primary purpose of tax accounting is IRS collecting revenue
primary purpose of fin accounting is providing useful info to stakeholders
Brian is self-employed plumber. Throughout 2010 Brian keeps no books and records. He does not file a 2010 tax return. In 2012 the IRS audits Brian's 2010 taxable year. Because Brian has no books and records for 2010, the IRS will be unable to successfully prove that Brian owes tax for 2010. True or False?
FALSE --- Brian has not regularly used ANY method of accounting. Thus, the IRS will be allowed to compute his income using any method within its discretion, including reconstruction methods.
Multiple trades or business
can use a different method of accounting for each trade or business if taxpayer is involved in multiple.
Beth was fired from OU because she received terrible teaching evaluations. Beth now makes her living by selling hot dogs outside Price Hall using a hot dog cart and by preparing tax returns.
a. May Beth use accrual method of accounting for her hot dog business and use cash method of accounting for her tax return business? Yes. They are clearly separate businesses.
b. If Beth wants to use different methods of accounting for selling hot dogs and preparing tax returns, may she use a single set of books for both businesses? No. She must keep separate books and records for each business
.c. May Beth use a single Schedule C for both selling hot dogs and preparing tax returns? No. A separate Schedule C must be filed for each business (even if use same method of accounting for all businesses).
Once a method of accounting has been established, before changing the method of accounting, the taxpayer must
file Form 3115 and obtain permission of IRS
This requirement applies to changing the timing treatment of any material item, which Treasury Regulations define as "any item which involves the proper time for the inclusion of the item in income or the taking of a deduction.
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