Taxing Definitions

All Events Test

Image source: openclipart.org When you use an accrual method of accounting, your financial statements reflect that you recognize income when you earn it and expenses when you incur them. The all events test is a standard for determining when an item of income or expense should be included on your income tax return. Income inclusion is covered in Regulation 1.451-1(a),…

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Taxing Definitions

Section 86(e) Election

Image source: Public domain via Wikimedia Commons  A section 86(e) election, also known as a “lump sum” election, is a way to reduce the amount of retroactive social security benefits included in your current year income. Under section 86 of the Internal Revenue code, part of your social security benefits can be taxable in the year you receive them. However,…

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Taxing Definitions

Priority Guidance List

Image source: openclipart.org When you’re looking for the answer to a tax law question, you turn to guidance published by the Internal Revenue Service, including revenue rulings, revenue procedures, notices and announcements. These documents interpret and explain the Internal Revenue Code. The IRS Office of Chief Counsel and the Treasury Department’s Office of Tax Policy are responsible for drafting and…

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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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