 Income tax 2023-2024. Tax law and tax authority. Get ready and some coffee because we're going to stop the tax man in his tracks with income tax preparation 2023-2024. Tax law like any law generally has a hierarchy of authority or different levels of guidance that can help us as we try to seek our goals and objectives as tax preparers and taxpayers that being to pay as little taxes as we are legally required to pay so some of those layers of authority include the statutory sources in essence the law itself administrative sources often provided say by the IRS who's trying to enforce the law and then judicial sources meaning court cases that come about about questions in a particular section of the law or in a particular area or position so in practice when we're doing our taxes or the taxes of others if we're doing basic taxes most of the positions might be fairly well laid out in the law itself and of course if the position that we are taking is laid out in the law it's pretty black and white it's pretty straight forward oftentimes the law can be confusing to read in and of itself so the IRS often provides guidance such as instructions to the forms that we're using like the form 1040 and publications and other resources that are basically outlining the IRS's position noting that the IRS's position is not actually the law itself it's the IRS's position about the law so there could be some gray area that we as taxpayers might say hey look I think this is what the law is saying I want to take this position and the IRS of course is taking a more stringent position oftentimes and then there could be court cases that happen as a result of that and in situations that have not been basically ironed out yet there's still a gray area then you might have to go to the court cases to determine what a particular position or what the best position might be in a particular scenario so that's the general overview now if we're a tax preparer then again we might want to question ourselves in terms of what kind of tax returns we want to be preparing if we're doing lower income basic tax returns we're probably dealing more with compliance we're probably not dealing with a lot of questions about I'm going to take a controversial position for example about the law that that hasn't been well ironed out and I'm going to be prepared first a word from our sponsor yeah actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us but but that's okay whatever because our merchandise is is better than their stupid stuff anyways like our trust me I'm an accountant product line yeah it's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions if you would like a commercial free experience consider subscribing to our website at accounting instruction dot com or accounting instruction dot think of it dot com to fight the irs on that right that's probably not the position you're taking all the time if you're doing lower income tax returns you're probably saying I'm working with a position that's pretty well laid out because I have all the documentation for it meaning the w twos are laid out if any any kind of programs that people are in there's already documentation that I'm I'm have from that I'm populating the tax return directly from you know the the income source documents and there might not be a lot of question about that whereas the statutory guidance the law itself is there and the administrative sources have been well defined and well outlined and there's not really any controversy about it and in that case your goal is just to basically crank out as you know more tax returns and try to and if you're a tax preparer to make money by doing more returns possibly with a lesser profit margin if you're dealing with more higher income tax returns or possibly returns that are in a particular sector particular types of businesses for example then you can run you could start to run into all types of scenarios where where there's a gray area in the law and that might maybe has not yet been ironed out yet maybe because what happens is congress is going to make the law but just like with any kind of law the question is they can't cover every type of scenario within the law they can just basically make the law and you can imagine all sorts of different scenarios you can see this in criminal law as well where it's like well I if I read the law this way it doesn't really I didn't really do anything wrong in that case right and then and then if that happens then what's going to happen is the IRS is going to take their position and then basically the taxpayers are going to take their position and then it'll be basically ironed out in the courts so the courts aren't actually making the law but they are setting up a precedent now so if and the iris will often state this with these types of cases where uh where there might be some gray area taxpayers interpreting the law vastly different than the irs is and and as the irs builds up and starts to win those cases which oftentimes they do because they're oftentimes taking a more reasonable position than some of these more extreme cases then then you're going to build up statutory cases and which will have the power you know similar to as if it was in the law itself is going to be the general idea so we want to go to the sources itself and then we can we can go to the interpretations from the irs for example and then if we still are have a gray area we can then go to the judicial sources lower income tax returns are probably going to be working mainly with the administrative sources from the irs and possibly going to the code itself but the sources are being constructed from well-established code uh generally is the idea and then more higher income individuals might be taking more positions that are outside of the norm or somewhere in the gray area in which case they're taking on more risk that they could have uh an audit or a question about a particular case in which case they'd have to defend themselves to the iris possibly go into court about it all right statutory sources so we've got the internal revenue code so obviously that the internal revenue code is law so the tax code is a subset of of course law itself so we can go to the actual you know law itself uh obviously the law is going to be written in some kind of basically legalese it's not too difficult to basically read through but that's going to be the source so if there's a question about a particular position if it has been laid out in the code itself then it's pretty black and white it is it is what it is but again there's going to be a lot of gray area with the code because the code cannot cover everything even though the code can be quite expansive the 16th amendment to the constitution so sometimes you hear you still hear arguments that we shouldn't be able to uh tax at all because the government shouldn't have the power to tax and whatnot and obviously taxation has been a huge debate or topic in the united states since its founding because the breaking out as a colony of england was you know largely due to uh questions and problems with regards to taxation as a colony so then the question of course was if we're going to do our own thing here then we shouldn't make the same mistake by having this massive centralized government that has become completely detached from the people that pay the taxes right that was the problem that we tried to get away from in the first place so but obviously there are some things that you need the federal tax for they decided early on and that was of course to defend ourselves right so if the if the if the king of england steps on this right and starts to take take over the place or france or whatever then then we had to we had to defend ourselves and you couldn't do that with a with a uh a rag tag group of people from all over the country that you had to then petition to come in you needed a standing army so that's what they needed defense was the mandatory thing that they first put in place uh it was a general idea and then of course the rich people were the people that were supposed to be the only ones that really were subject to the tax because they could afford it number one but also because they had the land was kind of the idea and then of course once the big government concept of taxation gets a hold it starts to expand so you can understand where it started from and now you might we can get to the idea of maybe it's a little too expansive right now i would argue that uh you know it's kind of got its tentacles a little gone a little crazy it seems like but you know that obviously the question now is not really whether the federal government can tax or not generally it's pretty well established at this point that the question is how big and how much taxes uh should the government be and and and how efficient should they be with the tax dollars that they have right so the administrative sources so that includes things like treasury regulations revenue rulings revenue procedures private letter rulings and irs notices so this will often help give us guidance so remember the tax law can be confusing in and of itself but it also even if you were able to interpret it is going to be written in such a way that it might have some gray areas in particular places the irs uh is generally going to be taking their position right they're going to take their position on what they believe the law is uh saying and you can basically we could follow you know their guidance on it which of course would be the safest thing to do generally but if you're talking about a new law then there might not be a real established pattern as of yet in which case the you know people might say well i don't really agree with the iris's position there because they're just interpreting the law they that's their prerogative to do but i'm i'm going to interpret it some other way and then you're going to get a and then you could get court cases basically to argue against that if the iris wins the court cases then the iris's position becomes more and more strong more and more firm based on the accumulation of the court cases and you get you end up with something that's basically as strong as you know the law in and in and of itself but there could be situations where the iris loses those those fights they might be overextending their position especially if they get political right because now he's like wait a second it doesn't say what you're saying doesn't make any sense anymore just sounds like you're attacking like a certain group of people so then then it could get you know kind of messy but that can help give us guidance so judicial sources so tax court us district court us court of federal claim so then then of course if you were to go to court with it or if you have a particular situation and you're saying i don't see it clearly in in the law that this covers it and i want to take this position that's going to pay less taxes and still be in compliance with the law and you don't see it in the statutory sources or you don't think there have been enough of them yet built up or you don't agree with them and then you look at the judicial record at this point in time and try to see if there's been an accumulation of cases because the general idea would be that that you know if the cases have built up and a a track record of taking a particular position that becomes a strong track record that they're going to basically continue with going forward so that would be your general idea so again lower income tax returns your your problem a lot of times lower income tax returns have issues with like like divorces and children dependency is this person a dependent of that person and so on because those have such huge impacts and like the earned income credit and the child tax credit are people actually married if they lived together like this kind of stuff was so you still get really confusing stuff on the low income side of things i'm not trying to say that low income tax returns are are easy uh they used to be but but i don't think i don't think and you've got these tax credits and stuff that but uh it's more likely that on the lower income tax side of things you're probably you're going to try to take the established position and possibly make your money by by doing more uh tax returns and at least the income side of things might be fairly straightforward and then usually the higher income tax returns that's when you as a cpa firm might take might take a position where you're going to do more research on particular cases and be there in the event that the iris comes back that's the problem with a lot of low income and individuals you get you run into sometimes tax preparers that are kind of scammy right because they're taking they're taking radical positions about about a certain thing without possibly doing the research on it and without basically being there when the taxpayer uh actually gets hit with an audit or something in the future because the iris is going to come back to the taxpayer preparer uh itself possibly not to the preparer so much although they're trying to get more information on the preparer these days the taxpayer is responsible for the creation of the taxes even though the tax code is so complex that they can't really do it by themselves oftentimes because it because it gets kind of complex with these types of questions uh and then of course in the event of an audit three years later you don't have anyone to support you right on the higher income side of things when you're working at a cpa firm part of part of the part of the of the deal could be or part of the benefits you might have in that situation as a taxpayer working with a higher income cpa firm is that the positions that they take hopefully they're going to be around to support them in the event of an audit right if an audit happens it would be nice if whoever helped you to make the tax returns would still be around to help make the case as to why they took the position that they took they might not win it or not but but it would be but that's you know those are the the two the sides that you would take basically beyond if you're doing tax preparation lower income you probably don't have the resources to to to do that maybe and you're just trying to crank out returns as best you can as in compliance as you can higher income taxpayers are going to be paying more possibly for support in the event that they're going to get audited which is possibly more likely because of the complexity of the returns when you have more complex uh income situations and uh so that's that's that