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Understanding Taxation: History, Objectives, and Practices

Explore the history, structure, and objectives of taxation, including different types of taxes, tax entities, and sources of tax law in the United States. Learn about tax rate structures, tax base, and the importance of tax research and computer applications in tax practice.

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Understanding Taxation: History, Objectives, and Practices

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  1. Chapter 1 An Introduction to Taxation

  2. Learning Objectives • Discuss the history of taxation • Differentiate between three types of tax rate structures • Describe the various types of taxes • Discuss what constitutes a “good” tax structure and the objectives of federal income tax law •Describe the tax entities in the federal income tax system

  3. Learning Objectives • Identify the various tax law sources and understand their implications for tax practice • Describe the legislative process for the enactment of the tax law • Describe administrative procedures under the tax law • Describe the components of a tax practice and understand importance of research process and computer applications in taxation

  4. History Of Taxation In The United States • First Federal Income Tax in 1861 • Repealed after the Civil War • Reinstated in 1894

  5. History Of Taxation In The United States • In 1895, the Supreme Court Ruled Unconstitutional • March 1, 1913, the Sixteenth Amendment • Revenue Acts From 1913 to Present

  6. Sixteenth Amendment To The Constitution Of The United States • The Congress Shall Have Power to Lay and Collect Taxes on Incomes, From Whatever Source Derived, Without Apportionment Among Several States, and Without Regard to Any Census or Enumeration.

  7. Manner In Which Tax Law Is Changed Of Modified • Federal income tax is changed on an incremental basis rather than a complete revision. • The tax law has been referred to as a “quiltwork” of tax law

  8. Revenue Sources

  9. Two Basic Parts Of Tax Structure • Tax Base • The amount to which the tax rate is applied to determine tax due. • For example, an individual’s tax base for the federal income is his or her taxable income. • tax base for property tax is generally the fair market value of property subject to tax. • Tax Rate • Is merely the percentage rate applied to the tax base.

  10. Rate Structures Can Be….. • Progressive • Regressive • Proportional Or Flat Tax

  11. Structure Of Corporate Tax Rates • Stair-step pattern of progression • Tends to benefit small corporations

  12. Corporate Tax Rates

  13. Marginal, Average, & Effective Tax Rates For Taxpayers • Marginal tax rate - tax rate applied to an incremental amount of taxable income that is added to a tax base • Average tax rate - total tax liability divided by amount of taxable income • Effective tax rate - total tax liability divided by total economic income

  14. Types Of Taxes • State Income Tax • Franchise Tax • Wealth Transfer Taxes

  15. Types Of Taxes • Federal Gift Tax • Other (Property, Federal Excise, Sales, Employment)

  16. Criteria For Tax Structure • Equity • Certainty • Convenience • Economy

  17. Objectives Of The Federal Income Tax Law • Economic • Raise Revenues for Government Operations • Stimulate Private Investment • Reduce Unemployment • Mitigate Effects on Inflation

  18. Objectives Of The Federal Income Tax Law • Encourage certain activities & industries • Social objectives

  19. Entities in the Federal Income Tax System • Tax Paying Entities • Individuals • C Corporations • Flow-through Entities • Sole proprietorship • Partnerships • S Corporations • LLC (Limited Liability Company) • LLP (Limited Liability Partnership • Trusts

  20. Tax Law Sources • Legislative • Executive (Administrative) • Judicial

  21. Tax Law Sources • Legislative: • Internal Revenue Code • Congressional Committee Report • Executive (Administrative): • Income Tax Regulations • Revenue Rulings • Revenue Procedures • Letter Rulings • Judicial: • Court Decisions

  22. Tax Law Interpretations Internal Revenue Code (Statutory tax law) Taxpayer Interpretations (1) Taxpayer (2) CPA representing taxpayer (3) Attorney (4) Non-licensed tax preparer Governmental Interpretations Internal Revenue Service (1) Revenue Rulings (2) Private Letter Rulings (3) Technical Advice Memoranda (4) Information Releases Secretary of the Treasury Regulations (1) Proposed (2) Temporary (3) Final

  23. Enactment Of Tax Law • House of Representatives is responsible for initiating new tax legislation. • Referred to the House Ways and Means Committee.

  24. Administration Of Tax Law • Organization of the Internal Revenue Service • Enforcement procedures • Selection of returns for audit • In 2002, the IRS launched the National Research Program (NRP) to select returns for audit • The NRP will update data compiled in the old TCMP Audits and develop new statistical models for identifying returns most likely to contain errors.

  25. Administration Of Tax Law • Statute of limitations • Interest • Penalties • Administrative Appeal Procedures

  26. Components Of A Tax Practice • Tax compliance & procedure • Tax research • Tax planning • Financial planning

  27. Computer Applications In Tax Practice • Tax return preparation • Tax planning • Project depreciation • Tax research • CD-ROM, Lexis, Internet Services

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