 Income tax 2022, 2023, tax law and tax authority. Let's do some wealth preservation with some tax preparation. Like any general set of laws or general set of rules, the tax law can get quite complicated quite quickly. Therefore, we need some kind of formalized structure, some kind of system that we can go to when doing tax preparation to help us in applying our general rules while doing tax preparation, which is one, to be in compliance with the tax law and two, to do so while being able to pay as little taxes as we're legally required to do. Now, normally if you have a fairly basic tax return, usually lower income tax returns, although those are getting more and more complex these days due to refundable credits and changes in the tax code, but if it's a fairly basic tax return, it's somewhat standardized. We have our W-2s, we've got our 1099s, and so on. We can be guided by the instructions on the actual forms such as the instructions for the Form 1040. But when things get more and more complicated, usually as income goes up, there could be a lot of gray area, such as, does this income count as something that needs to be included as taxable income? Does this deduction count as something that is deductible? The tax code itself isn't going to be able to address every conceivable component within question, within the law, so we might have a hierarchy then of guidance to try to see whether... Support Accounting Instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course, each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more, like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Or not, we are in compliance with it. So again, usually the starting point will be the documentations that are pretty straightforward, such as the W-2s, we can look up the instructions for the W-2s, the Form 1040 and the instructions for the 1040 itself, and then those documents oftentimes could guide us to other areas that might help us to do further research. But the general hierarchy would be the statutory source itself, the law itself. Now note, Congress is making the laws and you might note that the people in Congress are not like geniuses or anything like that. They're going to be able to cover every single component as they pass a law with regards to the tax code. And they're going to have to make some kind of assumptions because you can't explicitly lay out, even if you did it perfectly, a tax law that would address every basically kind of scenario. So then there's going to always be some questions about any new legislation that comes out any changes to the tax law generally. And then those kind of questions will be sorted out going forward, either with changes to the laws or there might be positions taken basically by the IRS and guidance on their end. And then you might have, of course, court cases that could help solidify a pattern as time passes. So obviously if a question that you have is answered by the law itself, then it is what it is. That would be a fairly black and white type of situation, fairly basic situation. If it's not, then you might have to go to other sources such as administrative sources. And if the question is not answered to your satisfaction there, then you've got to go to the judicial sources. Now note, when we're thinking about the authority of the law, then the job of the legislature is to pass the law, right? And then the job of the courts and the job in essence of the IRS, the IRS is going to interpret the law the way they think is the fair way to interpret the law. We as tax preparers might interpret the law differently and then we could settle those differences basically in a court situation. And the court situation then could set precedence basically over time. So you can actually, of course, argue with the IRS based on a gray area in the law. We can't argue with the IRS by saying, I just don't think that's fair because we're not arguing whether or not something is fair because that's going to be where the place you argued to see if something is fair is by voting for people who are going to put laws in that you believe are fair. Once the laws are in place, then we can argue over the interpretation of the law. The IRS might take more stringent of a stance than obviously taxpayers because the incentives are opposite and those types of positions might be worked out further in administrative sources or in the court. And so then when you're taking a position in a tax preparation scenario, you might be one taking a very black and white position in a lot of the cases which are basically covered by the law very straightforward. W2 income is W2 income. There's not much question about that. It's pretty straightforward at this point in time. It is what it is. If you're in a gray area, then you come into these places where you have to ask yourself, based on the evidence that is in place, do I have a valid position to take a position that might be contrary to what the IRS is currently taking at this point in time, given the newness of the laws or the not too many scenarios have been worked out in this particular area, or if there's less resources, then what's the likelihood in the event of like an audit that your position would hold up in court if it was questioned? That would be the kinds of questions you can ask. So again, how would you do that? Well, first you'd go to the statutory sources themselves. Now, obviously in practice, oftentimes you're going to be using the documentations, the W2s, the 1099s, you have the instructions related to them to help out. And within the instructions, they will often point you to other sources from the instructions given the law itself and given the other resources from other publications and so on. Also, you have the form 1040, which could then point you to the source of how they populated the 1040 with the law and publications from there as well. The statutory source is the internal revenue code itself. So obviously, like any kind of legal document, reading the internal code itself can be kind of tedious to do because of the structure of it. That's why oftentimes they put other resources as well to put in place, but it's not too bad to read the code and you can see how the code is basically organized by going to the code directly. So obviously that's the law. If it's laid out in black and white in the law, then you don't need to dig any deeper. It is what it is. If you want to change it, obviously you have to hire people in Congress that would change the law if you don't agree with it. Now you'll get some people that will argue that taxation itself is unconstitutional or un-American and whatnot, but obviously it's been in place. So that's the 16th amendment to the Constitution. So you might basically as a tax preparer kind of have that handy just to say, you know, this is where the authority basically originates from. Obviously you can go into debates in terms of, you know, what taxation was, was therefore in the beginning because in the beginning, of course, the United States is quite skeptical of taxation. It's one of the primary complaints that was had against England. And so but obviously the primary reason that taxation was needed is for military, right? That was the military on the federal government side of things because it's very difficult to have a militias in different states and whatnot. They can, they can come together and have a uniform objective for defense against like a foreign invader. So that was like the primary thing that said that, hey, we really need an income tax. And then over time, of course, the income tax used to be on only very wealthy people, which you would think equivalent to these days of like at least millionaires to billionaires. And now, of course, the income tax has grown and grown and the government's objectives have grown and grown. And you can argue whether that be good or bad in, you know, in terms of not just being the military but now having a social welfare state and so on. And you can argue how big and bloated that has, has become or not. That's kind of like it is what it is at this point in time. So it's not likely that you're just going to do away with the income tax. That's going to be a tough case to make, you know, but if you don't pay your taxes, you're probably not going to be going, it's not going to work out well. Administrative sources include the Treasury regulations, revenue rulings, revenue procedures, private letter rulings and IRS notices. So these are types of things that if there's something that's not being explicit in the law and people are going to basically have questions on it or the IRS has questions on it, they are going to kind of fill in, they might, you know, over time try to fill in the gap with it and try to build a case in essence for their position. Now, their position isn't as strong as the law itself, right? So you can still possibly argue with it, but the longer they build a case over time in their position and move in that direction, then the more, you know, resources of the more power they have behind the position basically that they are taking. So again, oftentimes if you're reading like the instructions to the form 1040, then they might point you to say publications and whatnot that could give further detail if you wanted to go to further detail based on those items. And then we've got the judicial sources. So tax court, U.S. district court, U.S. court, a federal claim. So now if you've got situations where you don't have enough guidance and then the tax, the court would be the next place to go because the court traditionally has been the place where basically they're going to build up over time precedent, right? So same kind of system here. So if something's not covered specifically in the law, then the court's going to try to interpret, you know, the law and basically over time as the court cases accumulate, that's going to be more and more evidence of it. And then again, if, if we're not content with the court cases evidence over time, it's going to become more and more specific over time. Then of course the legislature could make a specific law related to it and then the courts would have to go by whatever the law is. But if there's a gray area in it, then you might go down to court cases and then as the court cases happen, the IRS might take a position. If you read the IRS news, for example, they might take like a strong position on something that they think is an abusive tax practice that is not in compliance with the law. As they win court cases, if they do win the court cases, then their position is going to clearly become stronger and stronger even though another law has not been passed just through precedence of the court cases. And then of course, if they lose court cases, then the taxpayers position becomes stronger and stronger and then going forward you would be more in the right or have a better likelihood of being able to withstand and audit taking those kinds of positions. So again, the general idea if you're on a fairly basic or easy tax returns, usually the lower income ones, although those can get quite complex with all these rules that are happening with the refundable credits. But usually those are going to be more straightforward. It is what it is. You've got W2 income. It is what it is. It is usually when the tax returns get higher and you have more complexity in terms of like rental property and then in terms of investments and different types of investments and medical expenses and these kind of areas where things can get in the gray areas. These itemized deductions are oftentimes in the gray areas and what not or could be. You can imagine scenarios within them and that's when you might have to branch out and do more research beyond simply the code itself.