Chapter 1 Introduction to Federal Taxation

1. Chapter 1 Introduction to Federal Taxation ©2008 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 www.CCHGroup.com

2. 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) CCH Federal Taxation Comprehensive Topics Chapter 1, Exhibit 1

3. Tax Revenue Statistics CCH Federal Taxation Comprehensive Topics Chapter 1, Exhibit 2a

4. 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. CCH Federal Taxation Comprehensive Topics Chapter 1, Exhibit 2b

5. 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. CCH Federal Taxation Comprehensive Topics Chapter 1, Exhibit 3a

6. 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 CCH Federal Taxation Comprehensive Topics Chapter 1, Exhibit 3b

7. 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. CCH Federal Taxation Comprehensive Topics Chapter 1, Exhibit 4

8. 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. CCH Federal Taxation Comprehensive Topics Chapter 1, Exhibit 5a

9. 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. CCH Federal Taxation Comprehensive Topics Chapter 1, Exhibit 5b

10. 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 Comprehensive Topics Chapter 1, Exhibit 6