CH1 Sol - Tax Collection 1 The government desires...

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Unformatted text preview: Tax Collection 1. The government desires corporations to retain large sums of money for capital expansion. Whether or not individuals and corporations should share the tax burden more equally is a political decision. Corporation Taxes 2. This relates back to question 1. Some economists believe corporations should be encouraged to expand their activities as much as possible. Only when an individual receives compensation or dividends from a corporation should there be a tax. Excise Taxes 3. There are excise taxes on numerous items, such as alcohol, tobacco, gasoline, and luxury items such as airplanes, yachts, and expensive automobiles. If the government decides it is in the best interest of the country to control any of these items, it can raise the excise taxes. As the tax rises, consumer consumption will decrease although, as is well known, not proportionately. Value-Added Tax: Disadvantages 4. A value-added tax is like a sales tax. All individuals have certain needs—-—food, clothing, and shelter. If these items are taxed, it affects the poor and rich alike. However, the poor spend their income almost totally on these items, while the rich spend only a small percentage of their salaries on food, shelter, and clothing. Value-Added Tax: Advantages 5. The VAT has the ability to raise huge sums of money. Certainly, if Congress and the President desired to lower the deficit, one way to do so would be to impose a VAT. For each 1 percent of VAT over $12 billion is collected. ' Tax Avoidance v. Tax Evasion 6. Tax avoidance implies tax planning. An individual arranges affairs to minimize tax liability. Tax evasion occurs when there is a completed transaction and the taxpayer refuses to pay the tax due. Tax Avoidance: Investment Strategies 7. With an eye towards tax avoidance, the most logical investment is still tax-exempt municipal bonds. Another opportunity available to some taxpayers is real estate. The real estate rules have been tightened, but many investment opportunities still exist. Tax Evasion Penalties 8. The US. has a self-assessed income tax. To be effective, everyone who has a tax obligation must pay a fair share. An individual enjoying the benefits of the country must help defray the cost. Therefore, individuals convicted of evading taxes are prosecuted as criminals. Fraudulent Acts 9. The most common badges of fraud are: (l) Understatement of income (2) Claiming fictitious or improper deductions (3) Accounting irregularities (4) Allocation of income to related taxpayers in lower income tax brackets (5) Acts and conduct of the taxpayer, e.g., false statements 10. The tax gap is the dollar amount of taxes due the government but never collected. Much talk has taken place in recent years about the injustice of raising taxes while the tax gap is widening. The year 1996 was the first year in which the tax gap actually shrank in size. Tax Planning 11. By means of income—shifting, an individual’s tax liability can be reduced legally. This is a very important concept in family, financial, and estate and gift tax planning. Tax History 12. The federal government could not assess a direct tax. Taxing System and Social Influences 13. Changes in the taxing system to reflect changes in society and lifestyles include the following examples: (1) The Taxpayer Relief Act of 1997 incorporated provisions to help families with the cost of higher education. (2) During the 19605 and 19705, there was much interest in helping the poor and the elderly. This was reflected in the taxes and credits allowed for both groups. Alcohol, cigarettes, and gasoline are taxed heavily at the federal level. The imposition of these excise taxes is a social control imposed on consumers by the government in an effort to curb excesses. To further this social policy, a 10 percent luxury tax was imposed in 1990. The luxury tax expired on December 31, 2002. (3) In an effort to help low-wage earners, a much larger standard deduction was instituted for 1988 and thereafter. Tax Collection—Constitutional Authority 14. The Sixteenth Amendment, which took effect in 1913, gave Congress the clear authority to tax income from whatever source derived. Income Tax Law—Date of Enactment 15. The Revenue Act of 1913, which imposed an income tax, was made retroactive to March 1, 1913. The date is important for tax purposes because this is the date that is sometimes used as a basis for computing gain and loss. Revenue Legislation—Origination 16. The Constitution requires that revenue legislation originate in the House of Representatives. Revenue Legislation—Congressional Committees 17. The first step in revenue legislation is a hearing before the House Ways and Means Committee. If the bill is defeated by the House of Representatives, it may be referred back to committee; if it passes, it is sent to the Senate Finance Committee. Joint Conference Committee Functions 18. The Joint Conference Committee, composed of ranking members of the House Ways and Means Committee (seven members) and the Senate Finance Committee (five members), is responsible for the resolution of any differences between the House and Senate versions of a tax bill after passage. Multiple Choice—Legislative Process 19. a. The legislative process of a tax bill begins with the House Ways and Means Committee. Multiple Choice—Congressional Powers 20. c. The Sixteenth Amendment granted Congress the right to tax income from whatever source derived. Multiple Choice—Revenue Sources: Value-Added Tax 21. a. The value-added tax has great appeal to politicians because it has the potential to raise large sums of money. Multiple Choice—Revenue Sources: Personal Income Tax 22. d. An attractive characteristic of the personal income tax is that it has the ability to raise a considerable amount of money. Multiple Choice—Tax Reform 23. b. The changes brought about by the Tax Reform Act of 1986 were so extensive that the Internal Revenue Code of 1954 was redesignated as the Internal Revenue Code of 1986. Multiple Choice—Tax Reform 24. d. The American Recovery and Reinvestment Act of 2009 did not lower tax rates for the wealthy. Multiple Choice—Legislative Process 25. d. The Conference Committee is the vehicle employed for setting differences between the House and Senate versions of a tax bill. Multiple Choice—Jobs and Growth Tax Relief Reconciliation Act of 2003 26. (1. Capital gains are taxed at a maximum of 15 percent. Collectibles and Section 1202 gains are taxed at 28 percent. 27. (1. Three major provisions were: enhanced the child care credit, expanded energy incentives, and extended the first-time homebuyer credit. Multiple Choice—Tax Concepts 28. d. Depreciable property is not a capital asset. 29. d. Conduits must “file” a tax return even though they need not pay taxes, and the income is “passed through” to the owners. Emergency Economic Stabilization Act of 2008 30. The Emergency Economic Stabilization Act of 2008 provided $700 billion to help stabilize the economy. Also, it extended numerous provisions set to expire at the end of 2008. Research Problem—Tax Avoidance: Business Alternatives 3 1. The case of the appeal of Peterson & Pegau Baking Co. highlights the necessity of careful review of transactions. The sole issue in this case was whether royalties paid to Peterson and Pegau were indeed royalties or disguised dividends. The students should read the testimony of the accountant who prepared the corporate tax return. Of note is the accountant’s testimony on the selection of corporate form versus partnership status. The Board of Tax Appeals in this case ruled that the royalties were really disguised dividends. ...
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CH1 Sol - Tax Collection 1 The government desires...

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