CCH Federal Taxation Basic Principles Chapter 1 Introduction to Federal Taxation and Understanding the Federal Tax Law

1. CCH Federal TaxationBasic PrinciplesChapter 1Introduction to Federal Taxation and Understanding the Federal Tax Law ©2004, CCH INCORPORATED 4025 W. Peterson Ave. Chicago, IL 60646-6085 800 248 3248 http://tax.cchgroup.com

2. FederalTaxes • Income taxes • Corporations, individuals, fiduciaries • Employment taxes • Old age, survivors, disability, and hospital insurance (federal insurance contributions, self-employment insurance contributions), unemployment insurance, railroad retirement • Estate and gift taxes • Estate, gift, and generation-skipping transfers • Excise and custom taxes • Alcohol, tobacco, gasoline, other CCH Federal Taxation Basic Principles Chapter 1, Exhibit 1

3. Other Taxes • State and local taxes • Value-added tax (VAT) • Flat tax CCH Federal Taxation Basic Principles Chapter 1, Exhibit 2

4. Tax Revenue Statistics CCH Federal Taxation Basic Principles Chapter 1, Exhibit 3a

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 increase is largely attributable to expanded applications of technology and upgraded IRS information systems. CCH Federal Taxation Basic Principles Chapter 1, Exhibit 3b

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 report income even though the taxpayer already has a tax liability and all actions are definitely complete. CCH Federal Taxation Basic Principles Chapter 1, Exhibit 4a

7. Tax Avoidance v. Tax Evasion What frequently distinguishes avoidance from evasion is the intent of the taxpayer. Some identifying “badges” of fraud are: • Understatement of income • Claiming of fictitious or improper deductions • Accounting irregularities • Allocation of income • Acts and conduct of the taxpayer CCH Federal Taxation Basic Principles Chapter 1, Exhibit 4b

8. Year National Average 2002 0.59 % 2001 0.58 % 2000 0.49 % 1999 0.90 % 1998 0.99 % 1997 1.28 % 1996 1.64 % 1995 1.67 % 1994 1.08 % Audit Probabilities for Individuals CCH Federal Taxation Basic Principles Chapter 1, Exhibit 5

9. Sampling of TCMP Audit Probabilities CCH Federal Taxation Basic Principles Chapter 1, Exhibit 6

10. Statute of Limitations for IRS Assessments CCH Federal Taxation Basic Principles Chapter 1, Exhibit 7

11. Statute of Limitation for Taxpayer Refunds Taxpayers may file for refunds by the later of (Returns filed early are deemed to have been filed on the filing due date.) CCH Federal Taxation Basic Principles Chapter 1, Exhibit 8

12. Brief History of Federal Income Tax • Income Tax Law of 1894 • 2% on gains, profits, and income over $4,000 • declared unconstitutional in Pollack case • Corporation Excise Tax of 1909 • 1% excise tax on corporations with net income over $5,000 • Sixteenth Amendment and the Revenue Act of 1913 • Amendment allowed Congress to enact direct tax • Act imposed tax on net income of individuals and corporations • Act repealed the Corporation Excise Tax of 1909 CCH Federal Taxation Basic Principles Chapter 1, Exhibit 9

13. Tax Legislative Process 1. Tax bill is screened by House Ways and Means Committee 2. Consideration by the House of Representatives 3. Referred to Senate Finance Committee 4. Consideration by the Senate • Bill may be sent to Joint Conference Committee if the House and Senate differ. Bill would then be sent back to House and Senate for consideration. 5. Approval or veto by the President 6. Incorporation into the Code (if approved by President or if veto is overridden) CCH Federal Taxation Basic Principles Chapter 1, Exhibit 10

14. 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 CCH Federal Taxation Basic Principles Chapter 1, Exhibit 11