Taxing Definitions

General Welfare Doctrine

Image source: www.wpclipart.com Under the broad wording of the US Internal Revenue code section 61, income you receive from almost any source is taxable, unless specifically excluded. Yet some payments received from the government can escape taxation under a narrow set of circumstances not found in the law. Known as the general welfare exclusion, this doctrine excludes certain government benefits…

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Taxing Definitions

Badges of Fraud

Image source: www.wpclipart.com The penalties for tax fraud–the willful attempt to evade or defeat the payment of tax–are steep. For instance, under Internal Revenue Code section 6663(a) (dealing with civil fraud penalties), if any part of the underpayment of tax required to be shown on your return is due to fraud, the penalty is 75% of the portion of the…

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Taxing Definitions

The Cohan Rule

Image source: http://openclipart.org Substantiation is an underlying requirement of tax law. You’re required to maintain books and records to prove your income and deductions. Yet in some cases, the courts can allow reasonable deductions under what’s known as the “Cohan rule.” The rule springs from a 1930 court case involving George Cohan, a Broadway theatrical manager and producer. Mr. Cohan…

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Taxing Definitions

Economic Substance

Image source: Billy Hathorn via Wikimedia Commons Economic substance is a term for a “doctrine” initially created by courts. To curb tax shelters and/or sham schemes that serve no purpose other than tax avoidance, courts invoke the economic substance doctrine to deny deductions, credits and losses arising from these transactions. What’s it mean? Under the economic substance doctrine, when you enter…

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Taxing Definitions

Constructive Receipt

Image source: openclipart.org As a general rule, for tax purposes your income includes all the income you actually or constructively receive during the tax year. “Constructive receipt” means income is available to you without restriction. An example is when your bank pays interest on your checking account by depositing an amount in your account that you can use when you…

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Taxing Definitions

Transferee Liability

Image source: RRZEicons via Wikimedia Commons Transferee liability is a procedure that lets the IRS collect taxes, interest and penalties from you when you receive assets from someone else, or if you are legally responsible for paying the liability of the person or entity who transferred the assets to you. (See Internal Revenue Code Section 6901, Transferred Assets.) For example, say…

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Taxing Definitions

Alternative Media Center

Image source: Eddau, Public Domain via Wikimedia Commons The Alternative Media Center is a unit within the IRS that converts tax forms, publications and IRS web sites into formats accessible to people with disabilities. The Center publishes and distributes talking tax forms, Braille, text and large print versions of forms and publications, American Sign Language videos and IRS training materials…

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Taxing Definitions

Whipsaw

A whipsaw situation occurs when the IRS receives conflicting claims for the same items in the same transaction and has no reliable way to determine which claim is correct without additional information. Potential whipsaw situations can occur in various circumstances, such as divorce, when both spouses claim the same child, executive compensation issues involving restricted stock, or when multiple layers…

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Taxing Definitions

Tax Benefit Rule

Image source: Frank C. Müller via Wikimedia Commons Sometimes financial events straddle more than a single year. That can be a problem when your tax return needs to be filed on an annual basis. The tax benefit rule is one way to address this timing difference. For instance, say you take an itemized deduction on your federal income tax return for…

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Taxing Definitions

Contemporaneous

Image source: Dvortygirl via Wikimedia Commons The US tax code requires you to maintain contemporaneous records to substantiate several types of deductions, including vehicle mileage and charitable contributions of $250 or more. For charitable contributions, a “contemporaneous written acknowledgment” means you obtain the acknowledgment on or before the earlier of the date on which you file your return for the taxable…

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