Federal Tax Chapter 1

4 Major types of Federal Taxes

1. Income tax
2. Employment taxes
3. estate and gift taxes
4. excise and custom taxes

Employment taxes

FICA social security, FICA medicare and FUTA (old age, survivors and disability)

Income taxes

Individual Income tax and corporate income tax

Estate and gift taxes

Taxes on transfers of property

Excise and custom taxes

Taxes on transactions (taxes on the purchase of alcohol, tobacco and gasoline)

Tax Avoidance

saving tax dollars through specific actions to avoid the tax liability prior to the time it would have occurred according to the law

Tax Evasion

The taxpayer does not properly report income and expenses even though the taxpayer already has a tax liability and all actions are definitely complete.

Indication of taxpayer fraud

1. understatement of income
2. claiming of fictitious or improper deductions
3. accounting irregularities
4. Allocation of income
5. Acts and conduct of the taxpayer

Sixteenth amendment

- ratified on February 25th, 1913
- gave congress the power to directly or indirectly tax all income

Revenue Act of 1913

- effective March 1st, 1913
- imposed a tax on the net income of individuals and corporations.
- This act is the basis for income tax laws in the US

Tax Legislative Process

1. The constitution requires that all revenue legislation start in the House ways and means committee
2. The tax bill is sent to the House of Representatives for approval.
- The house debates the bill under a "closed rule" procedure (All amendments must b

Objectives of the Tax law

- Economic: Stimulate or control the economy
- Social: To encourage behavior (deductions for charitable contributions) or discourage behavior ( illegal kickbacks are not deductible)
- Political: To benefit ones own constituents or to discourage certain ac

Accrual Basis of accounting

The accrual basis is distinguished from the cash basis. On the accrual basis, income is accounted for as and when it is earned, whether or not it has been collected.

Capital Asset

Everything owed and used for personal purposes, pleasure, or investment is a capital asset.
Ex. Stocks, Bonds, a residence, household furnishing and a pleasure automobile

Conduits

Some entities are not tax paying. They pass through their income (loss) to owners (beneficiaries). A partnership is an example of a conduit because partnerships do not pay taxes; they merely report the partnership's taxable income or losses. Other types a

gross income

refers to all income that is taxable

Pay as you go tax system

The American tax system since 1943

The legislative process of a tax bill begins with the:

House Ways and Means Committee

The sixteenth amendment granted congress the right to:

Tax income from whatever source derived

The Value-added tax has great appeal to politicians because:

It has the potential to raise large sums of money. (Value-added tax taxes each process in manufacturing a product)

An attractive characteristic of the personal income tax is:

Raise a considerable amount of money

The tax reform act of 1986

Replaced the Internal revenue code of 1954 with the internal revenue code of 1986

when approving a tax bill and there are differences between the house and senate versions, the differences are resolved by the

Joint conference Committee

which item is not a capital asset?

Depreciable property

Major features of conduits

- pass through their income to owners
- need not pay taxes