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Ch01 - 1 Chapter 1 Introduction to Federal Taxation and...

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© 2011 CCH. All Rights Reserved. Chapter 1 1 Chapter 1 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 brie fl y summarized followed by a review of the federal legislative process. Fundamental Aspects of Federal Taxation ¶1101 Sources of Revenue Types of federal taxes include (1) income taxes on corporations, individuals, and fi duciaries, (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 fl at tax. ¶1121 Tax Collection and Penalties Taxes are big business and fi gures 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 fi le 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.” 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. Recodi fi ed the numerical referencing format of legislative tax law after signi fi cant 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 fi nal 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 af fi rmatively by a two-thirds majority to override a veto.
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