Chapter 1 Exhibits 1. 4 Major Types of Federal Taxes 2. Tax Revenue Statistics 3. Tax Avoidance v. Tax Evasion 4. Brief History of Federal Income Tax 5. Tax Legislative Process 6. Objectives of the Tax LawChapter 1, Exhibit Contents CCH Federal Taxation Basic Principles 2 of 11
4 Major Types of Federal Taxes 1. Income taxes Individual income tax and corporate income tax . 2. Employment taxes FICA Social Security, FICA Medicare and FUTA. 3. Estate and gift taxes Taxes on transfers of property 4. Excise and custom taxes Taxes on transactions (taxes on the purchase of alcohol)Chapter 1, Exhibit 1 CCH Federal Taxation Basic Principles 3 of 11
Tax Revenue Statistics Source % Total Avg. Rev. Overall Audit Tax Revenue ($’s # Returns Revenue per Return Probability in billions (#’s in millions)Individual Income Tax 43.36% $ 5,766 1.1% $994 141.2Corporate Income Tax 9.56% $11,859 1.4% $180 6.9Excise and CustomsTaxes 2.41% $54,150 2.3% $ 45.3 0.84Estate and Gift Tax 1.00% $72,753 10.1% $ 18.8 0.3Employment 43.67% $27,528 0.2% $820.0 29.8Partnerships N/A N/A 0.4% N/A 3.5Other (mostlyDeclarations of 0.0 - - -Estimated Tax) 47.9Totals 100.0% $2,058.1 230.4Source: Compiled from Internal Revenue Service Data Books for 2010. Chapter 1, Exhibit 2a CCH Federal Taxation Basic Principles 4 of 11
Tax Revenue Statistics The General Accounting Office has reported that U.S. taxpayer compliance is the highest in the world, approximately 83 to 85 percent. Nevertheless, the IRS has acknowledged that the problem of tax evasion is a serious one. Each percentage point of noncompliance costs the government approximately $7 billion in lost revenue. The IRS has decreased its audit coverage of individual returns since the mid-1990s. The decrease is largely due to technology and upgraded IRS information systems.Chapter 1, Exhibit 2b CCH Federal Taxation Basic Principles 5 of 11
Tax Avoidance v. Tax Evasion Tax avoidance—Saving tax dollars through specific actions to avoid the tax liability prior to the time it would have occurred according to the law. Tax evasion—The taxpayer does not properly report income and expenses even though the taxpayer already has a tax liability and all actions are definitely complete.Chapter 1, Exhibit 3a CCH Federal Taxation Basic Principles 6 of 11
Tax Avoidance v. Tax Evasion What frequently distinguishes avoidance from evasion is the intent of the taxpayer. Some indications of taxpayer fraud are: Understatement of income Claiming of fictitious or improper deductions Accounting irregularities Allocation of income Acts and conduct of the taxpayerChapter 1, Exhibit 3b CCH Federal Taxation Basic Principles 7 of 11
Brief History of Federal Income Tax The Sixteenth Amendment was ratified on February 25, 1913. It gave Congress the power to directly or indirectly tax all income. The Revenue Act of 1913 (effective March 1, 1913) imposed a tax on the net income of individuals and corporations. This act is the basis for income tax laws in the US.Chapter 1, Exhibit 4 CCH Federal Taxation Basic Principles 8 of 11
Tax Legislative Process 1. The Constitution requires that all revenue legislation start in the House Ways and Means Committee. 2. The tax bill is sent to the House of Representatives for approval. The House debates the bill under a “closed rule” procedure (all amendments must be approved by the House Ways and Means Committee). 3. If approved by the House of Representatives, the bill is sent to the Senate Finance Committee. The Finance Committee may make amendments to the House bill.Chapter 1, Exhibit 5a CCH Federal Taxation Basic Principles 9 of 11
Tax Legislative Process 4. The bill is sent to the Senate for approval. Any senator may offer amendments from the floor of the Senate. Bill may be sent to a Joint Conference Committee if the House and Senate differ. The bill would then be sent back to House and Senate for consideration. At this point, no further amendments can be made. 5. Approved or vetoed by the President 6. Incorporated into the Code if approved by President or if veto is overridden.Chapter 1, Exhibit 5b CCH Federal Taxation Basic Principles 10 of 11
Objectives of the Tax Law Economic—to stimulate or control the economy Social—to encourage behavior (e.g., deduction for charitable contributions) or discourage behavior (e.g., illegal kickbacks are not deductible) Political—to benefit one’s own constituents or to discourage certain activitiesChapter 1, Exhibit 6 CCH Federal Taxation Basic Principles 11 of 11
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