Introduction to Federal Taxation and
Understanding the Federal Tax Law
SUMMARY OF CHAPTER
This chapter presents information on the magnitude of federal taxes collected and on taxpayer obligations.
Also, the history of U.S. federal taxation is briefly summarized followed by a review of the federal legislative
Fundamental Aspects of Federal Taxation
¶1101 Sources of Revenue
Types of federal taxes include (1) income taxes on corporations, individuals, and fiduciaries, (2) employment
taxes, (3) estate and gift taxes, and (4) excise and customs taxes. Also, revenues are generated from state and local
taxes. Consideration is given to the attractiveness of alternative systems—the value-added tax and flat tax.
¶1121 Tax Collection and Penalties
Taxes are big business and figures are given to demonstrate just how vast and complex the federal revenue
collection system has become. In 1989, the civil tax penalty provisions were extensively revamped to create a fairer,
less complex and more effective penalty system. Changes were made in the (1) document and information return
penalties, (2) accuracy-related penalties, (3) preparer, promoter, and protester penalties, and (4) penalties for
failure to file or pay.
¶1131 Taxpayer Obligations
A clear understanding of tax avoidance versus tax evasion is necessary to achieve good tax planning. Tax
avoidance is legal and a legitimate pursuit of a business entity. Tax evasion requires the presence of a tax liability.
There is a legal obligation to disclose a tax liability based on completed transactions and the refusal to report the
tax liability is illegal.
¶1151 Brief History of the Federal Income Tax
The adoption of the Sixteenth Amendment to the Constitution enabled Congress to levy “taxes on income,
from whatever source derived.Ä A brief chronological history of changes affecting the tax law from 1913 to the
present is presented.
16th Amendment (2/15/1913)
. Congress empowered itself to tax income.
Revenue Act of 1913
. Imposed income tax on individuals, corporations and other entities, effective 3/1/1913.
Internal Revenue Codes of 1939, 1954 and 1986
. Recodified the numerical referencing format of legislative
tax law after significant tax law revisions had occurred.
¶1161 Federal Tax Legislative Process
Steps in the enactment of a revenue bill are (1) origination in the House of Representatives Ways and Means
Committee, (2) passage by the House, (3) passage by the Senate, (4) resolution of differences in House and Senate
versions by the Joint Conference Committee, composed of members of both legislative bodies, (5) approval of the
final version by both the House and the Senate, (6) approval or veto by the President, and (7) incorporation into the
Internal Revenue Code. Both the Senate and the House must vote affirmatively by a two-thirds majority to override