2. 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 Law
Chapter 1, Exhibit Contents CCH Federal Taxation Basic Principles 2 of 11
3. 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)
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4. 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% $994 141.2
Corporate Income Tax 9.56% $11,859 1.4% $180 6.9
Excise and Customs
Taxes 2.41% $54,150 2.3% $ 45.3 0.84
Estate and Gift Tax 1.00% $72,753 10.1% $ 18.8 0.3
Employment 43.67% $27,528 0.2% $820.0 29.8
Partnerships N/A N/A 0.4% N/A 3.5
Other (mostly
Declarations of 0.0 - - -
Estimated Tax) 47.9
Totals 100.0% $2,058.1 230.4
Source: Compiled from Internal Revenue Service Data Books for 2010.
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5. 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.
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6. 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.
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7. 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 taxpayer
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8. 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.
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9. 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.
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10. 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.
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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 activities
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