Individual Income Taxes C1-1 Chapter 1 An Introduction to Taxation and Understanding the Federal Tax Law Copyright ©2009 Cengage Learning Individual Income

C1-C1-11Individual Income TaxesIndividual Income Taxes

Chapter 1Chapter 1

An Introduction to Taxation and Understanding the Federal Tax LawAn Introduction to Taxation and

Understanding the Federal Tax Law

Copyright ©2009 Cengage Learning

Individual Income Taxes

Individual Income TaxesIndividual Income Taxes

History of Taxation (slide 1 of 2)History of Taxation (slide 1 of 2)

• Prior to 1900s income tax financed wars– 1861: First Federal individual income tax

enacted• Repealed after Civil War

– 1894: New Federal individual income tax enacted

• Tax found to be unconstitutional

• Prior to 1900s income tax financed wars– 1861: First Federal individual income tax

enacted• Repealed after Civil War

– 1894: New Federal individual income tax enacted

• Tax found to be unconstitutional

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History of Taxation (slide 2 of 2)History of Taxation (slide 2 of 2)

• Other important events– 1909: First Federal corporate income tax

enacted– 1913: 16th Amendment ratified

• Sanctioned both Federal individual and corporate income taxes

• Other important events– 1909: First Federal corporate income tax

enacted– 1913: 16th Amendment ratified

• Sanctioned both Federal individual and corporate income taxes

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Federal Budget Receipts—2008Federal Budget Receipts—2008

FIGURE 1–1

Individual income taxes 47%

Corporation income taxes 12

Social insurance taxes and contributions 35

Excise taxes 2

Other 4

Total 100%

Individual income taxes 47%

Corporation income taxes 12

Social insurance taxes and contributions 35

Excise taxes 2

Other 4

Total 100%

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Criteria for Evaluating a Tax Structure (slide 1 of 2)


• Adam Smith identified the following canons of taxation to consider when evaluating tax structures:– Equality– Convenience– Certainty– Economy

• Adam Smith identified the following canons of taxation to consider when evaluating tax structures:– Equality– Convenience– Certainty– Economy

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• In addition, the AICPA suggests that the tax system should be: – Simple

– Neutral in terms of its effect on business

– Clear and readily understandable

– Structured to minimize noncompliance

– Should not reduce economic growth and efficiency, and

– Should enable the IRS to predict the amount and timing of revenue

• In addition, the AICPA suggests that the tax system should be: – Simple

– Neutral in terms of its effect on business

– Clear and readily understandable

– Structured to minimize noncompliance

– Should not reduce economic growth and efficiency, and

– Should enable the IRS to predict the amount and timing of revenue

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Tax Structure (slide 1 of 2)Tax Structure (slide 1 of 2)

• Tax base: amount to which the tax rate is applied

• Tax rates: applied to the tax base to determine the tax liability– May be proportional, progressive, or regressive

• Incidence of tax: degree to which the tax burden is shared by taxpayers

• Tax base: amount to which the tax rate is applied

• Tax rates: applied to the tax base to determine the tax liability– May be proportional, progressive, or regressive

• Incidence of tax: degree to which the tax burden is shared by taxpayers

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Tax Structure (slide 2 of 2)Tax Structure (slide 2 of 2)

• Examples:• Examples:

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Income $10 $20 $30

Proportional Tax

$3 (30%) $6 (30%) $ 9 (30%)

Progressive Tax

$3 (30%) $7 (35%) $12 (40%)

Regressive Tax

$3 (30%) $5 (25%) $6 (20%)


Major Types of TaxesMajor Types of Taxes

• Property Taxes

• Transaction Taxes

• Death Taxes

• Gift Taxes

• Income Taxes

• Employment Taxes

• Other U.S. Taxes

• Property Taxes

• Transaction Taxes

• Death Taxes

• Gift Taxes

• Income Taxes

• Employment Taxes

• Other U.S. Taxes

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Property (ad valorem) TaxesProperty (ad valorem) Taxes

• Based on the value of the asset

• Generally on realty or personalty

• Exclusive jurisdiction of states and their

local political subdivisions

• Deductible for Federal income tax purposes

• Based on the value of the asset

• Generally on realty or personalty

• Exclusive jurisdiction of states and their

local political subdivisions

• Deductible for Federal income tax purposes

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Transaction TaxesTransaction Taxes

• Excise taxes

• General sales taxes

• Severance taxes

• Excise taxes

• General sales taxes

• Severance taxes

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Excise TaxesExcise Taxes

• Imposed at the Federal, state, and local levels• Restricted to specific items

– Examples: gasoline, tobacco, liquor

• Declined in relative importance until recently – Example-two types of excise taxes at the local level

have recently become increasingly popular • Hotel occupancy tax • Rental car surcharge

– Tax is levied on visitors who cannot vote and often used to fund special projects

• Imposed at the Federal, state, and local levels• Restricted to specific items

– Examples: gasoline, tobacco, liquor

• Declined in relative importance until recently – Example-two types of excise taxes at the local level

have recently become increasingly popular • Hotel occupancy tax • Rental car surcharge

– Tax is levied on visitors who cannot vote and often used to fund special projects

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General Sales TaxesGeneral Sales Taxes

• Currently jurisdiction of states and localities

• States that impose sales taxes also charge a use tax on items bought in other states but used in their jurisdiction

• States without sales or use taxes are Alaska, Delaware, Montana, New Hampshire, and Oregon

• Currently jurisdiction of states and localities

• States that impose sales taxes also charge a use tax on items bought in other states but used in their jurisdiction

• States without sales or use taxes are Alaska, Delaware, Montana, New Hampshire, and Oregon

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Severance TaxesSeverance Taxes

• Tax on natural resources extracted– Important revenue source for states rich in

natural resources

• Tax on natural resources extracted– Important revenue source for states rich in

natural resources

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Death Taxes (slide 1 of 2)Death Taxes (slide 1 of 2)

• Tax on the right to transfer property or to receive property upon the death of the owner– If imposed on right to pass property at death

• Classified as an estate tax

– If imposed on right to receive property from a decedent

• Classified as an inheritance tax

• Tax on the right to transfer property or to receive property upon the death of the owner– If imposed on right to pass property at death

• Classified as an estate tax

– If imposed on right to receive property from a decedent

• Classified as an inheritance tax

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Death Taxes (slide 2 of 2)Death Taxes (slide 2 of 2)

• The value of the property transferred provides the base for determining the amount of the death tax

• The Federal government imposes only an estate tax

• Many state governments levy inheritance taxes, estate taxes, or both

• The value of the property transferred provides the base for determining the amount of the death tax

• The Federal government imposes only an estate tax

• Many state governments levy inheritance taxes, estate taxes, or both

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Federal Estate Tax(slide 1 of 2)


• Federal estate tax is on the right to pass property to heirs– Gross estate includes FMV of property

decedent owned at time of death • Also includes property interests, such as life

insurance proceeds paid to the estate or to a beneficiary other than the estate if the deceased-insured had any ownership rights in the policy

• Federal estate tax is on the right to pass property to heirs– Gross estate includes FMV of property

decedent owned at time of death • Also includes property interests, such as life

insurance proceeds paid to the estate or to a beneficiary other than the estate if the deceased-insured had any ownership rights in the policy

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• Property included in the gross estate is valued at either:– Date of death, or – If elected, the alternate valuation date

• Generally 6 months after date of death

– Certain deductions and credits allowed • Examples - marital deduction, funeral and admin.

expenses, certain taxes, debts of decedent

• Property included in the gross estate is valued at either:– Date of death, or – If elected, the alternate valuation date

• Generally 6 months after date of death

– Certain deductions and credits allowed • Examples - marital deduction, funeral and admin.

expenses, certain taxes, debts of decedent

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Unified Transfer Tax CreditUnified Transfer Tax Credit

• Unified credit reduces or eliminates the estate tax liability for modest estates

• For 2008, credit is $780,800 – Offsets tax on $2,000,000 of the tax base

• Unified credit reduces or eliminates the estate tax liability for modest estates

• For 2008, credit is $780,800 – Offsets tax on $2,000,000 of the tax base

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Phaseout of Estate TaxPhaseout of Estate Tax

• The estate tax has been criticized for the hardship it imposes on small businesses and family farms

• Tax Relief Reconciliation Act of 2001 included the phase out of the estate tax– Unified transfer credit is scheduled to increase over a

10 year period

– Estate tax is due to be eliminated in 2010

• Sunset provision reinstates estate tax as of January 1, 2011

• The estate tax has been criticized for the hardship it imposes on small businesses and family farms

• Tax Relief Reconciliation Act of 2001 included the phase out of the estate tax– Unified transfer credit is scheduled to increase over a

10 year period

– Estate tax is due to be eliminated in 2010

• Sunset provision reinstates estate tax as of January 1, 2011

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State Death TaxesState Death Taxes

• State death taxes may be estate tax, inheritance tax, or both– Inheritance tax is on the right to receive

property from a decedent– Tax is generally based on relationship of heir to

decedent• The more closely related, the lower the tax

• State death taxes may be estate tax, inheritance tax, or both– Inheritance tax is on the right to receive

property from a decedent– Tax is generally based on relationship of heir to

decedent• The more closely related, the lower the tax

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Federal Gift Tax (slide 1 of 3)


• Tax on the right to transfer assets during a person’s lifetime– Applies only to transfers that are not supported by full

and adequate consideration

• Taxable gift = FMV of gift less annual exclusion less marital deduction (if applicable)

• Federal gift tax provides an annual exclusion of $12,000 per donee (in 2008)– Amount is adjusted for inflation

• Tax on the right to transfer assets during a person’s lifetime– Applies only to transfers that are not supported by full

and adequate consideration

• Taxable gift = FMV of gift less annual exclusion less marital deduction (if applicable)

• Federal gift tax provides an annual exclusion of $12,000 per donee (in 2008)– Amount is adjusted for inflation

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• Married persons can make a special election to split gifts– Allows 1/2 of a gift made by a donor-spouse to

be treated as having been made by a nondonor-spouse (gift splitting)

– Effectively increases the number of annual exclusions available and allows the use of the nondonor-spouse’s unified transfer tax credit

• Married persons can make a special election to split gifts– Allows 1/2 of a gift made by a donor-spouse to

be treated as having been made by a nondonor-spouse (gift splitting)

– Effectively increases the number of annual exclusions available and allows the use of the nondonor-spouse’s unified transfer tax credit

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• The unified transfer tax credit is available for gifts (as well as the estate tax)

• Despite the proposed repeal of the estate tax, the gift tax has been retained with the unified transfer tax credit frozen at $345,800, covering $1,000,000 of taxable gifts

• The unified transfer tax credit is available for gifts (as well as the estate tax)

• Despite the proposed repeal of the estate tax, the gift tax has been retained with the unified transfer tax credit frozen at $345,800, covering $1,000,000 of taxable gifts

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Gift and Estate Unified Tax Schedule

Gift and Estate Unified Tax Schedule

• Gift and estate taxes are unified under a single tax rate schedule– Since tax rates are progressive, prior years’

transfers must be considered when calculating the current year’s gift or estate tax

• Gift and estate taxes are unified under a single tax rate schedule– Since tax rates are progressive, prior years’

transfers must be considered when calculating the current year’s gift or estate tax

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Income TaxesIncome Taxes

• Imposed at the Federal, most state, and some local levels of government– Income taxes generally are imposed on individuals,

corporations, and certain fiduciaries (estates and trusts)

• Federal income tax base is taxable income (income less allowable exclusions and deductions)

• Most jurisdictions attempt to assure tax collection by requiring pay-as-you-go procedures, including– Withholding requirements for employees, and – Estimated tax prepayments for all taxpayers

• Imposed at the Federal, most state, and some local levels of government– Income taxes generally are imposed on individuals,

corporations, and certain fiduciaries (estates and trusts)

• Federal income tax base is taxable income (income less allowable exclusions and deductions)

• Most jurisdictions attempt to assure tax collection by requiring pay-as-you-go procedures, including– Withholding requirements for employees, and – Estimated tax prepayments for all taxpayers

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Formula for Federal Income Tax on Individuals (Slide 1 of 3)


Income (broadly conceived) $xx,xxxLess: Exclusions (x,xxx)Gross income $xx,xxxLess: Certain deductions for AGI(x,xxx)Adjusted Gross Income $xx,xxx

Income (broadly conceived) $xx,xxxLess: Exclusions (x,xxx)Gross income $xx,xxxLess: Certain deductions for AGI(x,xxx)Adjusted Gross Income $xx,xxx

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Adjusted Gross Income $xx,xxxLess: The greater of:

Itemized deductions, or The standard deduction (x,xxx)

Less: Personal and dependency exemptions (x,xxx)

Taxable income $xx,xxx

Adjusted Gross Income $xx,xxxLess: The greater of:

Itemized deductions, or The standard deduction (x,xxx)

Less: Personal and dependency exemptions (x,xxx)

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Formula for Federal IncomeTax on Individuals (Slide 3 of 3)

Formula for Federal IncomeTax on Individuals (Slide 3 of 3)

Tax on taxable income (see Tax Rate Schedules in Appendix A) $ x,xxx

Less: Tax credits (including Federal income tax withheld and other prepayments of Federal income taxes) (xxx)

Tax due (or refund) $ xxx

Tax on taxable income (see Tax Rate Schedules in Appendix A) $ x,xxx

Less: Tax credits (including Federal income tax withheld and other prepayments of Federal income taxes) (xxx)

Tax due (or refund) $ xxx

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Corporate Income TaxCorporate Income Tax

Corporate Taxable Income = Income - Deductions– Does not require the computation of adjusted

gross income– Does not provide for the standard deduction or

personal and dependency exemptions– All allowable deductions are business expenses

Corporate Taxable Income = Income - Deductions– Does not require the computation of adjusted

gross income– Does not provide for the standard deduction or

personal and dependency exemptions– All allowable deductions are business expenses

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State Income Tax (slide 1 of 3)State Income Tax (slide 1 of 3)

• All but the following states impose an income tax on individuals:– Alaska, Florida, Nevada, South Dakota, Texas,

Washington, and Wyoming

• All but the following states impose an income tax on individuals:– Alaska, Florida, Nevada, South Dakota, Texas,

Washington, and Wyoming

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• Some characteristics of state income taxes include:– With few exceptions, all states require some form of

withholding procedures

– Most states use as the tax base the income determination made for Federal income tax purposes

• Some states apply a flat rate to Federal AGI

• Some states apply a rate to the Federal income tax liability

– Referred to as the piggyback approach to state income taxation

• Some characteristics of state income taxes include:– With few exceptions, all states require some form of

withholding procedures

– Most states use as the tax base the income determination made for Federal income tax purposes

• Some states apply a flat rate to Federal AGI

• Some states apply a rate to the Federal income tax liability

– Referred to as the piggyback approach to state income taxation

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• Some states ‘‘decouple’’ from select tax legislation enacted by Congress– State may not be able to afford the loss of revenue

resulting from such legislation

• Because of tie-ins to the Federal return, states may be notified of changes made by the IRS upon audit of a Federal return– In recent years, the exchange of information between

the IRS and state taxing authorities has increased

• Some states ‘‘decouple’’ from select tax legislation enacted by Congress– State may not be able to afford the loss of revenue

resulting from such legislation

• Because of tie-ins to the Federal return, states may be notified of changes made by the IRS upon audit of a Federal return– In recent years, the exchange of information between

the IRS and state taxing authorities has increased

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Employment Taxes (slide 1 of 3)Employment Taxes (slide 1 of 3)

• FICA taxes– Paid by both an employee and employer– In 2008, Social Security rate is 6.2% on a

maximum of $102,000 of wages, and Medicare rate is 1.45% on all wages

• A spouse employed by another spouse is subject to FICA

• Children under the age of 18 who are employed in a parent’s trade or business are exempt from FICA

• FICA taxes– Paid by both an employee and employer– In 2008, Social Security rate is 6.2% on a

maximum of $102,000 of wages, and Medicare rate is 1.45% on all wages

• A spouse employed by another spouse is subject to FICA

• Children under the age of 18 who are employed in a parent’s trade or business are exempt from FICA

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• FICA taxes– Sole proprietors and independent contractors

may also be subject to Social Security taxes• Known as the self-employment tax

• Rates are 12.4% for Social Security and 2.9% for Medicare

– Twice the rates applicable to an employee

• The tax is imposed on net self-employment income up to a base amount of $102,000 for 2008

• FICA taxes– Sole proprietors and independent contractors

may also be subject to Social Security taxes• Known as the self-employment tax

• Rates are 12.4% for Social Security and 2.9% for Medicare

– Twice the rates applicable to an employee

• The tax is imposed on net self-employment income up to a base amount of $102,000 for 2008

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• FUTA (unemployment) taxes– Provides funds for state unemployment benefits – In 2008, rate is 6.2% on first $7,000 of wages for

each employee– Administered jointly by states & Fed govt.

• Credit is allowed (up to 5.4%) for FUTA paid to the state

– Tax is paid by employer

• FUTA (unemployment) taxes– Provides funds for state unemployment benefits – In 2008, rate is 6.2% on first $7,000 of wages for

each employee– Administered jointly by states & Fed govt.

• Credit is allowed (up to 5.4%) for FUTA paid to the state

– Tax is paid by employer

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Other TaxesOther Taxes

• Federal customs duties – Tariffs on certain imported goods

• Franchise taxes – Levied on the right to do business in the state

• Occupational taxes – Applicable to various trades or businesses

• e.g., liquor store license, taxicab permit, fee to practice a profession

• Federal customs duties – Tariffs on certain imported goods

• Franchise taxes – Levied on the right to do business in the state

• Occupational taxes – Applicable to various trades or businesses

• e.g., liquor store license, taxicab permit, fee to practice a profession

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Proposed TaxesProposed Taxes

• Flat tax– Would replace the current graduated income tax with a

single rate

• Value added tax – Taxes the increment in value as goods move through

production & manufacturing stages to the market• Paid by the producer and reflected in the sales price of goods

• National sales tax– Levied on the final sale of goods and services

• Collected from consumer, not from businesses as with VAT

• Flat tax– Would replace the current graduated income tax with a

single rate

• Value added tax – Taxes the increment in value as goods move through

production & manufacturing stages to the market• Paid by the producer and reflected in the sales price of goods

• National sales tax– Levied on the final sale of goods and services

• Collected from consumer, not from businesses as with VAT

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Tax Administration (slide 1 of 4)Tax Administration (slide 1 of 4)

• Internal Revenue Service (IRS)– Responsible for enforcing the Federal tax laws

– Audits small percentage of returns filed using mathematical formulas and statistical sampling

• To update selection criteria, the IRS selects a cross section of returns, which are subject to various degrees of inspection

• Results highlight areas of taxpayer noncompliance and enable the IRS to use its auditors more productively

• Internal Revenue Service (IRS)– Responsible for enforcing the Federal tax laws

– Audits small percentage of returns filed using mathematical formulas and statistical sampling

• To update selection criteria, the IRS selects a cross section of returns, which are subject to various degrees of inspection

• Results highlight areas of taxpayer noncompliance and enable the IRS to use its auditors more productively

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• Types of audits: – Correspondence audit– Office audit

• Usually restricted in scope and conducted in facilities of IRS

– Field audit • Involves examination of numerous items reported

on the return and is conducted on premises of taxpayer or taxpayer's representative

• Types of audits: – Correspondence audit– Office audit

• Usually restricted in scope and conducted in facilities of IRS

– Field audit • Involves examination of numerous items reported

on the return and is conducted on premises of taxpayer or taxpayer's representative

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• After the audit, a Revenue Agent’s Report (RAR) is issued summarizing the finding which can result in a:– Refund (tax was overpaid)– Deficiency (tax was underpaid), or– No change (tax was correct) finding

• After the audit, a Revenue Agent’s Report (RAR) is issued summarizing the finding which can result in a:– Refund (tax was overpaid)– Deficiency (tax was underpaid), or– No change (tax was correct) finding

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• If an audit results in an assessment of additional tax– Taxpayer may attempt to negotiate a settlement

• An appeal is available through the Appeals Division of the IRS– Appeals Division is authorized to settle all disputes based on the hazard

of litigation (i.e., probability of favorable resolution, if litigated)

– If a satisfactory settlement is not reached on administrative appeal, the taxpayer can litigate in:

• Tax Court• Federal District Court, or• Court of Federal Claims

– Litigation is recommended only as a last resort because of • Legal costs involved• Uncertainty of the final outcome

• If an audit results in an assessment of additional tax– Taxpayer may attempt to negotiate a settlement

• An appeal is available through the Appeals Division of the IRS– Appeals Division is authorized to settle all disputes based on the hazard

of litigation (i.e., probability of favorable resolution, if litigated)

– If a satisfactory settlement is not reached on administrative appeal, the taxpayer can litigate in:

• Tax Court• Federal District Court, or• Court of Federal Claims

– Litigation is recommended only as a last resort because of • Legal costs involved• Uncertainty of the final outcome

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Statute of Limitations (slide 1 of 3)Statute of Limitations (slide 1 of 3)

• Statute of limitations offers a defense against a suit brought by another party after the expiration of a specified period of time– Purpose is to preclude parties from prosecuting stale claims

• The passage of time makes defense of such claims difficult since witnesses may no longer be available or evidence may have been lost or destroyed

• For Federal income tax purposes, the two categories involved relate to the statute of limitations applicable to:– The assessment of additional tax deficiencies by the IRS, and – The period that deals with claims for refunds by taxpayers

• Statute of limitations offers a defense against a suit brought by another party after the expiration of a specified period of time– Purpose is to preclude parties from prosecuting stale claims

• The passage of time makes defense of such claims difficult since witnesses may no longer be available or evidence may have been lost or destroyed

• For Federal income tax purposes, the two categories involved relate to the statute of limitations applicable to:– The assessment of additional tax deficiencies by the IRS, and – The period that deals with claims for refunds by taxpayers

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• For a deficiency assessment by IRS– Generally 3 years from the later of the due date

or the filing date of the return– For material (more than 25%) omissions of

gross income, time period is 6 years– No statute if no return filed or fraudulent return

filed

• For a deficiency assessment by IRS– Generally 3 years from the later of the due date

or the filing date of the return– For material (more than 25%) omissions of

gross income, time period is 6 years– No statute if no return filed or fraudulent return

filed

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• For a refund claim by taxpayer– Generally 3 years from date return filed or 2

years from date tax paid, whichever is later

• For a refund claim by taxpayer– Generally 3 years from date return filed or 2

years from date tax paid, whichever is later

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Interest and Penalties (slide 1 of 2)Interest and Penalties (slide 1 of 2)

• Interest accrues on the taxes due starting from the due date of the return and interest is paid on refunds if not received within 45 days of when the return was filed– Current rate for January 1–March 31 of 2008 is

7% (determined quarterly by the IRS)

• Interest accrues on the taxes due starting from the due date of the return and interest is paid on refunds if not received within 45 days of when the return was filed– Current rate for January 1–March 31 of 2008 is

7% (determined quarterly by the IRS)

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Interest and Penalties (slide 2 of 2)Interest and Penalties (slide 2 of 2)

• Tax law provides various penalties for lack of compliance including penalties for:– Failure to file

• Penalty is 5% per month up to a max of 25% on the amount of tax shown as due on the return

– Any fraction of a month counts as a full month

– Failure to pay• Penalty is 0.5% per month up to a max of 25%

– Penalties may also apply to underpayment of estimated taxes, negligence, etc.

• Tax law provides various penalties for lack of compliance including penalties for:– Failure to file

• Penalty is 5% per month up to a max of 25% on the amount of tax shown as due on the return

– Any fraction of a month counts as a full month

– Failure to pay• Penalty is 0.5% per month up to a max of 25%

– Penalties may also apply to underpayment of estimated taxes, negligence, etc.

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Tax Practice (slide 1 of 4)Tax Practice (slide 1 of 4)

• Area of tax practice is largely unregulated– Members of professions must follow certain

ethical standards (CPAs, Attorneys)– Various penalties may be imposed upon

preparers of Federal tax returns who violate proscribed acts and procedures

• Area of tax practice is largely unregulated– Members of professions must follow certain

ethical standards (CPAs, Attorneys)– Various penalties may be imposed upon

preparers of Federal tax returns who violate proscribed acts and procedures

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• Ethical guidelines issued by AICPA:– Do not take questionable position on client’s tax

return in hope of it not being audited– Client’s estimates may be used if reasonable– Try to answer every question on the tax return

(even if disadvantageous to client)– Upon discovery of an error in prior year tax

return, advise client to correct

• Ethical guidelines issued by AICPA:– Do not take questionable position on client’s tax

return in hope of it not being audited– Client’s estimates may be used if reasonable– Try to answer every question on the tax return

(even if disadvantageous to client)– Upon discovery of an error in prior year tax

return, advise client to correct

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• Statutory penalties may be levied on tax return preparers for:– Procedural Matters-Failure to:

• Provide copy of return to taxpayer

• Sign the return as preparer

• Keep copies of returns

• Maintain a client list

• Statutory penalties may be levied on tax return preparers for:– Procedural Matters-Failure to:

• Provide copy of return to taxpayer

• Sign the return as preparer

• Keep copies of returns

• Maintain a client list

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• Statutory penalties may be levied on tax return preparers for:– Understatement of tax liability based on a

position that lacks a realistic possibility of being sustained

– Willful attempts to understate tax– Failure to exercise due diligence in determining

eligibility for, or the amount of, the earned income tax credit

• Statutory penalties may be levied on tax return preparers for:– Understatement of tax liability based on a

position that lacks a realistic possibility of being sustained

– Willful attempts to understate tax– Failure to exercise due diligence in determining

eligibility for, or the amount of, the earned income tax credit

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Understanding the Federal Tax Law (slide 1 of 3)


• The Federal tax law is the vehicle for accomplishing many objectives of the nation such as:– Raising revenue: the major objective of the tax

system but not the sole objective– Economic: increasingly important objective is

to regulate the economy and encourage certain behavior and businesses considered desirable

• The Federal tax law is the vehicle for accomplishing many objectives of the nation such as:– Raising revenue: the major objective of the tax

system but not the sole objective– Economic: increasingly important objective is

to regulate the economy and encourage certain behavior and businesses considered desirable

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• Federal tax objectives– Social: encourage socially desirable behavior

that provides benefits that government might otherwise provide

– Equity: equity within the tax laws (e.g., wherewithal to pay concept) and not necessarily equity across taxpayers

• Federal tax objectives– Social: encourage socially desirable behavior

that provides benefits that government might otherwise provide

– Equity: equity within the tax laws (e.g., wherewithal to pay concept) and not necessarily equity across taxpayers

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• Federal tax objectives– Political: a large segment of the tax law is

created through a political process; thus, compromises and special interest dealings occur

– Ease of administration: many provisions are meant to aid the IRS in the collection of taxes

– Courts: influence tax law and sometimes cause it to change

• Federal tax objectives– Political: a large segment of the tax law is

created through a political process; thus, compromises and special interest dealings occur

– Ease of administration: many provisions are meant to aid the IRS in the collection of taxes

– Courts: influence tax law and sometimes cause it to change

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If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA [email protected]

SUNY Oneonta

If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA [email protected]

SUNY Oneonta

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Documents

Individual Income Taxes C1-1 Chapter 1 An Introduction to Taxation and Understanding the Federal Tax Law Copyright ©2009 Cengage Learning Individual Income