ACAT ATP flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Gross income definition

All income from whatever source derived, unless specifically excluded by the Internal Revenue Code. Exclusions must be explicit statutory provisions, not implied.

Above-the-line deduction

An adjustment subtracted from gross income to compute adjusted gross income. Available whether or not the taxpayer itemizes. Examples include IRA and HSA contributions.

Adjusted gross income

Gross income minus above-the-line deductions. AGI is the trigger for many phase-outs, limitations, and credit eligibility thresholds throughout the Code.

Standard deduction

A fixed deduction amount set by filing status and indexed annually. Taxpayers may take it instead of itemizing; additional amounts apply for age 65+ and blindness.

Itemized deductions

Deductions claimed after AGI, including state and local taxes subject to a cap, mortgage interest, charitable contributions, and medical expenses exceeding a percentage floor of AGI.

Long-term capital gain

Gain on an asset held more than one year. Taxed at preferential rates of 0, 15, or 20 percent depending on taxable income and filing status.

Short-term capital gain

Gain on an asset held one year or less. Taxed at the taxpayer's ordinary income rates rather than preferential long-term capital gain rates.

Capital loss limitation

Net capital losses offset ordinary income up to $3,000 per year, or $1,500 for married filing separately. Excess amounts carry forward indefinitely.

Section 121 exclusion

Excludes up to $250,000 of gain ($500,000 if married filing jointly) on sale of a principal residence owned and used two of the prior five years.

Head of household status

Filing status for an unmarried or considered-unmarried taxpayer who paid over half the cost of maintaining a home for a qualifying person for over half the year.

Qualified business income deduction

Generally 20 percent of qualified business income from a pass-through entity, subject to wage and property limits and specified service business restrictions at higher income.

Early distribution penalty

A 10 percent additional tax on retirement plan distributions before age 59½, unless an exception applies such as disability, separation at 55, or qualified higher education expenses.

Earned income credit

A refundable credit for low- and moderate-income workers with earned income, based on income level, filing status, and number of qualifying children.

Child tax credit

A credit for qualifying children under age 17, subject to phase-out at higher income levels. A portion may be refundable as the additional child tax credit.

Dependent exemption rules

A qualifying child or relative must meet relationship, age, residency, support, and joint return tests. Only one taxpayer may claim a dependent under tie-breaker rules.

Filing status determination

Status is determined as of the last day of the tax year. Five statuses exist: single, married filing jointly, married filing separately, head of household, qualifying surviving spouse.

Circular 230 written advice

Practitioners may not give written advice based on unreasonable factual or legal assumptions or that unreasonably relies on taxpayer representations without reasonable inquiry.

Preparer understatement penalty

Under IRC 6694, a $1,000 penalty applies for unreasonable positions; $5,000 for willful or reckless conduct, with income-based alternatives applying.

Preparer signature requirement

A paid preparer must sign a return and include a valid PTIN. Failure to do so may result in a separate penalty under IRC 6695.

Reliance on client information

A preparer may rely in good faith on client-provided information but must make reasonable inquiries when the information appears incorrect, incomplete, or inconsistent.

Three-year assessment period

The IRS generally has three years after a return is filed to assess tax. The period extends to six years if gross income omitted exceeds 25 percent.

Six-year assessment period

Applies when the taxpayer omits gross income exceeding 25 percent of the amount reported on the return. The period runs six years from filing.

Unlimited assessment period

No statute of limitations applies when a return is fraudulent, when no return is filed, or when a frivolous return is filed. Assessment may occur at any time.

Individual return due date

Returns are due the 15th day of the fourth month after year-end, typically April 15. An extension extends the filing date but not the payment date.

Automatic filing extension

Form 4868 grants an automatic six-month extension to file an individual return. Tax owed is still due by the original due date to avoid penalties.

Estimated tax safe harbor

No underpayment penalty if payments equal 90 percent of current-year tax or 100 percent of prior-year tax, raised to 110 percent when prior AGI exceeds $150,000.

Section 7216 confidentiality

Prohibits tax return preparers from disclosing or using tax return information without taxpayer consent, subject to enumerated statutory exceptions.

Practitioner sanctions

Circular 230 authorizes censure, suspension, or disbarment from practice before the IRS for violating regulations or engaging in disreputable conduct.

Due diligence requirement

Preparers must exercise due diligence in determining eligibility for, and the amount of, credits such as EITC, and must retain records supporting the determination.

Accuracy-related penalty

A 20 percent penalty on underpayment attributable to negligence, substantial understatement, or valuation misstatement. The rate rises to 40 percent for gross valuation misstatements.

Failure-to-file penalty

Generally 5 percent of unpaid tax per month, up to 25 percent. The rate is reduced when the failure-to-pay penalty also applies in the same month.

Failure-to-pay penalty

Generally 0.5 percent of unpaid tax per month, up to 25 percent. It continues to accrue after an extension because extensions do not extend the payment date.