Individuals and businesses are subject to various types of taxes
Taxes should be one consideration when making personal and business decisions
History of taxation 1634 First tax by English Colonist, not the federal government
1861 Tax to fund the Civil War; taxes were repealed after the war; tariffs were sufficient
1894 New federal income tax on individuals; It was later repealed
1909 Corporate income tax
1913 16th Amendment sanctioned individual & corporate tax
Revenue Acts 1913 First Form 1040 (tax rate range from 2% to 6%) 1913 & 1939 Revenue Acts 1913 & 1939 1943 Current tax payment Act (pay-as-you-go) 1954 & 1986 Revenue Acts of 1954 & 1986 1986 to present There have been many amendments to the tax laws
Basis of tax structure
In the 18th century, Adam Smith identified the following canons of taxation used to evaluate the tax structure. A good tax structure has the following characteristics:
Equality Equitable treatment; taxes in proportion to one’s income and it’s measured by one’s ability to pay taxes
Convenience Low administrative cost and taxes are easily assessed and collected
Certainty A good tax structure allows a taxpayer to know when, where, and how taxes are levied.
Economy Nominal collection cost for the government and minimal compliance cost for the taxpayer
Tax structure Tax base: Taxable income
Taxable income Gross income reduced by allowable deductions
Progressive: Tax rates increase as income increases, i.e., federal income tax, state income tax, gift taxes & estate taxes
Major types of tax
Property taxes: Ad valorem taxes imposed on realty & personalty class asset
Transaction taxes: Federal excise taxes (inland tax), state/local excise taxes, general sales taxes, use tax, severance taxes (on extraction of natural resources)
Death taxes: Estate tax is a tax on the transfer of property;
$5 million exclusion for 2012
Unified transfer tax credit is $1,772,800 for 2012.
Death taxes: Inheritance tax is a tax on the receipt of property from a decedent
Gift taxes: federal & state gift taxes:
Annual exclusion: $13,000 per donee;
Unified transfer tax credit is $1,772,800 for 2012.
Income taxes: Federal, state, & local income taxes
Other taxes:
Federal customs duties (border tax) or tariffs on imported goods
Franchise tax is a tax on the right to do business in a state
Occupational tax (or fees for licenses for certain services or to sell certain products like liquor)
Proposed US taxes:
Flat tax
Value added tax (VAT) is a consumption tax paid by the producer but reflected in the selling price of the product
National sales tax
State income taxes: All states impose an income tax except for:
Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming.
Tax administration
Internal Revenue Service (Department of the Treasury)
The Audit Process
Selection of returns for Audit
Discriminant Index Formula (DIF) is a mathematical formula and sampling techniques used to select tax returns that are most likely to contain errors and yield a substantial amount of additional tax revenues upon audit.
Types of Audits
Correspondence audits
Office audits
Field audits
Settlement procedures
Settlement with an IRS agent
Administrative Appeal: Appeal Divisions is there is no agreement between the taxpayer and the IRS agent.
Litigation: Tax Court, Federal District Court, Court of Federal Claims
Statute of limitations (assessments and refunds):
Assessments:
3 years period from the later of April 15 or the date filed.
6 years period (if understatement of gross income is more than 25%)
None statute of limitation for tax returns not filed or for fraudulent tax returns
Refunds:
Later of 3 years from date of filing or within 2
