CH1 Study Guide Tax 4011

CH1 Study Guide Tax 4011 - TOPIC I INTRODUCTION TO FEDERAL...

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Unformatted text preview: TOPIC I INTRODUCTION TO FEDERAL TAXATION AND UNDERSTANDING THE FEDERAL TAX LAW Summary This chapter presents information concerning sources of revenue and tax collection data Also provided is a historical background of the US. revenue system and federal tax legislation. Tax avoidance is distinguished from tax evasion, and the impact of tax penalties is discussed. Basic tax concepts are also explained. Outline 1. II. III. Sources of Revenue. A. Individual income taxes provide approximately 52 percent of the government’s tax revenue; corporate income taxes provide approximately 13 percent B. Other revenues are provided by estate and gift taxes, excise taxes, and customs taxes. Tax Collection Data. A. More than 250 million tax returns and supplementary documents were filed in 2008. B. IRS is relying on computer technology to cross-check taxpayer information. Tax Penalties. A Penalties are imposed for failure to pay taxes when due, failure to make federal tax deposits, late filing, negligence, fraud, etc. B. J ail sentences may be imposed for those found guilty of tax fraud. Taxpayer Obligations. A. Tax evasion is escaping tax by illegal means. B. Tax avoidance is a reduction of tax through legal means. History of Federal Tax Legislation. A. The Sixteenth Amendment to the Constitution (ratified on February 25, 1913) gave Congress the power to tax income from whatever source derived without apportionment among the States. B. Revenue Act of 1913 imposed a new income tax on the net income of individuals and corporations, and made it retroactive to March 1, 1913. C. The Internal Revenue Code of 1939 was the first separate codification of the internal revenue laws. D. The Internal Revenue Code of 1954 completely revised the Internal Revenue Code of 1939. 1. largest piece of federal tax legislation in history. 2. The Internal Revenue Code of 1954 was frequently amended (e.g., Tax Reform Act of 1986). E. The Tax Reform Act of 1986, one of the most significant tax law revisions in history, renamed the Internal Revenue Code the Internal Revenue Code of 1986. Federal Tax Legislative Process. A Tax legislation generally begins in the House of Representatives. 1. Hearings before the House Ways and Means Committee. 2. The Committee drafts tax bill and sends to House for debate. 3. Tax bill passed by House is sent to Senate Finance Committee. B. Finance Committee may amend bill, then send to Senate for possible additional amend- ments and passage. 1. If Senate- and House-passed versions of tax bill differ, the tax bill is sent to Conference Committee for resolution of differences. 2. Uniform tax bill sent back to House and Senate for approval in final form. Federal Tax Study Manual 3. The tax bill passed by House and Senate goes to President (a) President signs; tax bill becomes law. (b) President vetoes; a two-thirds vote in House and Senate is needed to override veto. VII. Basic Tax Concepts. A Assignment of income. Income cannot be assigned to another taxpayer. Income is taxed to the person who earned it because of having provided services or because of the ownership of property. B. Basis. An amount assigned to an asset for purposes of computing depreciation or detemiining a gain or loss upon the property’s sale or exchange. If property is acquired by purchase, its basis is its cost. C. Capital asset. A taxpayer’s capital assets generally consist of property held for invest- ment and property held for personal use. The gains and losses from capital assets are subject to special rules. D. Claim of right doctrine. Even though an amount of income has not yet been earned, the amount must nevertheless be included in income upon the earlier of actual or constructive receipt if the taxpayer has an unrestricted claim to such amount (e.g., prepaid rent is included in income in the year received). E. Constructive receipt doctrine. Even though an amount of income has not been physically received, it is nevertheless included in income if it is unqualifiedly available to the taxpayer (e.g., interest accrued on a savings account). F. Substance v. form. A judicial concept used to determine the true nature of a transac- tion (e.g., a bargain sale of property to a family member may be treated as a gift). G. Tax benefit rule. A recovery of an item deducted in an earlier year must be included in income to the extent that the previous deduction provided a benefit by reducing the taxpayer‘s income tax (e.g., recovery of a bad debt; refund of state income tax). lOplC L—lntroduction to Federal Taxation 3 Objective Questions True-False Indicate whether each statement is true or false. H HHHH HII ll H 1. 2. P99 90>]ng 10. 11. 12. 13. 14. 15. 16. 17. 18. The value-added tax is an example of a direct tax. The Thirteenth Amendment to the Constitution empowered Congress to collect taxes with apportionment. In 1913, the personal exemption for a single person was $3,000. The IRS currently audits approximately five percent of all individual tax returns that are filed. Current federal income tax law is found in the Internal Revenue Code of 1986. Any Senator may offer amendments to a tax bill from the floor of the Senate. The percentage of individual tax returns audited increased in fiscal year 2008. Estate and gift taxes account for approximately 10 percent of the total revenue generated by the federal government. Excise taxes are levied on transactions, not on income or wealth. Property taxes generate the most revenue for local governments. The federal income tax is self-assessing. There is a clear demarcation line between tax avoidance and tax evasion. Germany was the first major country to adopt a value-added tax. National revenue collections serve as a window for monitoring social change. Approximately 62 percent of all tax returns are filed by individuals. Corporate income taxes accounted for approximately 20 percent of the revenue generated by the government in 2008. The federal income tax on corporations is an indirect tax. The Deficit Reduction Act of 1984 was the largest revenue-raising bill ever passed. 4 Answers True-False 1. NQWPPN 9° 10. 11. 12. 13. 14. 15. 16. 17. 18. False. False. True. False. True. True. False. False. True. True. True. True. False. True. True. False. False. False. Federal Tax Study Manual It is an indirect tax on value added to a product at all levels of production and distribution. The Sixteenth Amendment permitted income taxes without apportionment The IRS audits less than one percent of all individual tax returns filed. The percentage of individual returns audited remained the same (1.0 percent) from the previous year (2007). Estate and gift taxes accounted for approximately one percent of the total revenue generated by the federal government France was the first major country to adopt a value-added tax. Corporate taxes accounted for approximately 13 percent of the revenue generated by the government in 2008. The federal income tax on corporations is a direct tax. The 1982 Tax Equity and Fiscal Responsibility Act (TEFRA) was the largest ' revenue—raising bill ever passed. ...
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