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Types of Taxes
- Income taxes, employment taxes, estate and gift taxes, exise and customs taxes
- 1.999 trillion raised in 2011
- US has highest rate of participation and compliance
Individual Income Taxes
Tax on income of an individual, which accounted for about 50% of the gross internal revenue collected
Corporate Income Taxes
Tax on net income of a corporation, which accounted for about 9% of the total revenue collected
Estate and Gift Taxes
Tax on the transfer of property and giving of gifts, which accounts for about 1% of the total revenue collected
Excise and Customs Taxes
- Taxes levied on transaction, not income or wealth, and accounts for about 3% of the total revenue collected
- excise-alcohol, tobacco, and gasoline
- Custom-taxes on goods entering the country used to protect the US industry from foreign competition
State and Local Taxes
- Taxes to generate revenue on the state and local level.
- State revenue are from income tax and sales tax
- Local revenue are from property tax
A tax on products, regressive tax
Direct and Indirect Taxes
- Direct taxes are federal income tax on individuals and corporations
- Indirect tax are those levied on producers or distributors with the taxes being passed on to consumers
- A flat tax is a one tax rate system
- individual's total income minus allowances for family size and apply one tax rate
- corporations pay one tax rate
A consumption tax that resembles the sales tax
Returns and Collections
taxes and tax collections are a big business with 234.6 million federal tax returns and supplementary docs processed in 2011 and 1.999 trillion dollars collected. Increased dramatically between 1980-2011
Tax Audits and Penalties
US tax system is a voluntary compliance system with a compliance rate of 83-85%. Tax fraud is reducing because the increasing use of technology by the IRS. Audit rate is declining as well with only certain types of taxpayers and those with higher incomes having a higher probability of being selected for audit. Many law changes to impose penalties on taxpayers for not complying with the tax laws.
Arrange transactions and affairs in such a manner as to reduce a tax liability. Avoid the tax liability prior to the time it would have occurred according to law
Guilty of evading taxes when their is already a tax liability. All actions are complete, and in spite of the liability, the taxpayer does not report income. Intent to misrepresent the facts
"Badges" of fraud
- Understatement of Income
- Claiming of fictitious or improper deductions
- Accounting irregularities
- Acts and conduct of the taxpayer
Corporate Tax Avoidance
- If the Commissioner feels that there is no principle purpose for the tax-free acquisition, "such deductions, credit, or allowance" may be disallowed.
- The escaping of taxation is not "business"
Taxpayer Assessment of Tax liability
- Decrease potential tax liability by choosing greatest tax savings
- Example of tax savings is investing in municipal bonds whose interest is tax free than corporate whose interest is subject to tax.
Income Tax Law of 1894
Wilson Tariff Bill of 1894
- Bill which allowed for an income tax.
- 2% of gains, profits, and income over $4000 on individuals and corportation
- Supreme Court declared unconstitutional because of not being an apportionment among the states
Corporation Excise Tax 1909
- First Act to be upheld b the courts that taxed corporate profits.
- 1% tax on net income over $5,000
- was a tax for the privilege of doing business as a corporation
- repealed in 1913
- Passed by Congress July 12, 1909 and stated
- That Congress has the power to lay and collect taxed on incomes, from whatever source derived, without apportionment among the States, and without regard to any census or enumeration
Revenue Act of 1913
Imposed a tax on the net income of individuals and corporations based on the power granted by the 16 Amendment
Federal Tax Legislative Process
- House of Representatives Ways and Means Committee
- House Of Representatives
- (amendments to come only if approved by W&M Committee)
- Senate Finance Committee
- (amendments can be offered)
- If different
- Joint Conference Committee
- House and Senate
- (no further amendments)
- if vetoed two third majority from Senate and House
Tax Reform Act of 1986
Internal Revenue Code of 1986
- Most extensive overhaul of he U.S. tax code
- removed many deduction
- Reduced number of people eligible for IRAs
- Inflation adjustment-standard deduction, personal exemptions amounts, earned income credit
- signed by Regan
Tax... Act 2010
- reduced individual tax rades
- $1,000 child tax credit
- tax break for students
- two-year alternative min tax patch
- payroll tax cut 2%
- 100% bonus depreciation
- enhance jobless benefits for unemployed
- revives estate tax for decedents dying after Dec 2009
American Taxpayer Relief Act of 2012
- extension of tax breaks about to expire
- Bush-era cuts to sunset for taxpayers with income over 400-450 K
- alternative min tax permanently patch
- maximum estate tax 40% with $5 million exclusion
- raised income tax on income 400-450K to 39.6%
- maximum capital gains tax 20%
- 5 year extension on American Opportunity tax Credit
- 2 year extention on certain business tax items
- extends marriage penalty relief provisions
- reinstates limits on itemized deduction
- revives personal exemption phaseout
Provisions of the tax law used to help stimulate or the economy, encourage capital investment, or direct resources to selected business activities
Provisions of the tax law to encourage behavior (e.g., deduction for charitable contributions) or discourage behavior (e.g., illegal kickbacks are not deductible)
provisions of the tax law introduced to benefit one’s own constituents or to discourage certain activities
Accrual basis of accounting
- Income accounted for when it is earned and expenses deducted when they are incurred.
- Does not matter if money has been collected or payed
Assignment of income doctrine
- Seeks to "preserve the progressive rate structure of The Code by prohibiting the splitting of income among taxable entities."
- courts trying to limit tax evasion
Cost of property which includes the amount of cash paid and the fair market value of other property provided in the transaction
A transaction must be grounded in a business purpose other than tax avoidance, which is not a proper motive for being in business.
- Everything owned and used for personal purposes, pleasure, or investment
- Ex-stocks, bonds, car, gems, residence
Income is reported when received in money or property, and expenses are deducted only in they year they are paid.
Claim of right
- causes a taxpayer to recognize income if they receive the income even though they do not have a fixed right to the income.
- even if it might be returned and refunded
- An entity that is not tax paying and pass their income (loss) to owners (beneficiaries).
- Once an individual has an absolute right to the income, it must be recognized.
- Ex-interest earned on bank account even if not withdrawn
- Individual, corporation, trusts, and estate.
- They determine own tax and files own return
Refers to all income that is taxable
Length of time that property is held by the taxpayer, or length of time the taxpayer is treated for income tax purposes as having held it.
Gain derived from capital, labor, or both
Transferring income from one family member to another who is subject to a lower tax rate or the selection of a form of business that decreases the tax liability for its owners.
Pay-as-you-go tax system
The American tax system where the various types of taxpayers pay tax throughout the year, not just at year-end.
Realized v. recognized gain or loss
A gain or loss is realized when a transaction is complete. A recognized gain or loss occurs when a taxpayer is obligated to pay on a completed transaction
Substance v. form
- What the form"what u call it" is vs the substance "what is really happening"
Tax benefit rule
If a taxpayer deducted an amount from his gross income in one year resulting in a tax benefit to him or her, and an event occurred in a later year that was fundamentally inconsistent with the premise on which the deduction was based, then the taxpayer must include an amount in gross income of the current year to the extent that the amount was deducted in the prior year.
- The amount of income subject to tax
- minus allowable deductions
Wherewithal to pay
Concept that the taxpayer should be taxed on a transaction when he or she has the means to pay the tax.