Transcript Introduction to Federal Taxation and Understanding the

CCH Federal Taxation
Basic Principles
Chapter 1
Introduction to
Federal Taxation and
Understanding the Federal
Tax Law
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Federal Taxes
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Income taxes
 Corporations, individuals, fiduciaries
Employment taxes
 Old age, survivors, disability, and hospital insurance
(federal insurance contributions, self-employment
insurance contributions), unemployment insurance,
railroad retirement
Estate and gift taxes
 Estate, gift, and generation-skipping transfers
Excise and custom taxes
 Alcohol, tobacco, gasoline, other
Chapter 1, Exhibit 1
CCH Federal Taxation Basic Principles
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Other Taxes
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Chapter 1, Exhibit 2
State and local taxes
Value-added tax (VAT)
Flat tax
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Tax Revenue Statistics
Source
% Total Avg. Rev.
Revenue
per
Return
Overall
Audit
Probability
Tax Revenue
($’s in
billions
# Returns
(#’s in
millions)
Individual Income
Tax
51.46%
$ 7,966
0.57%
$1,038
130.3
Corporate Income
Tax
10.48%
$37,018
0.97%
$211
5.7
Excise and Customs
Taxes
2.59%
$57,778
1.03%
$ 52
0.9
Estate and Gift Tax
1.35%
$67,500
5.84%
$ 27
0.1
Employment
34.12%
$23,625
0.06%
$688
29.1
Partnerships
N/A
N/A
0.26%
0.0
-
Other (mostly
Declarations of Estimated
Tax)
Totals
-
N/A
2.2
-
58.0
100.0%
$2,016
226.6
Source: Compiled from Internal Revenue Service Data Books for 2002.
Chapter 1, Exhibit 3a
CCH Federal Taxation Basic Principles
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Tax Revenue Statistics

The General Accounting Office has reported that U.S.
taxpayer compliance is the highest in the world,
approximately 83 to 85 percent.
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Nevertheless, the IRS has acknowledged that the
problem of tax evasion is a serious one. Each
percentage point of noncompliance costs the
government approximately $7 billion in lost revenue.

The IRS has decreased its audit coverage of individual
returns since the mid-1990s. The increase is largely
attributable to expanded applications of technology and
upgraded IRS information systems.
Chapter 1, Exhibit 3b
CCH Federal Taxation Basic Principles
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Tax Avoidance v. Tax Evasion
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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 report
income even though the taxpayer already
has a tax liability and all actions are
definitely complete.
Chapter 1, Exhibit 4a
CCH Federal Taxation Basic Principles
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Tax Avoidance v. Tax Evasion
What frequently distinguishes avoidance from
evasion is the intent of the taxpayer. Some
identifying “badges” of fraud are:
 Understatement of income
 Claiming of fictitious or improper
deductions
 Accounting irregularities
 Allocation of income
 Acts and conduct of the taxpayer
Chapter 1, Exhibit 4b
CCH Federal Taxation Basic Principles
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Audit Probabilities for Individuals
Year
National Average
2002
2001
0.59 %
2000
1999
0.49 %
0.90 %
1998
0.99 %
1997
1.28 %
1996
1995
1.64 %
1.67 %
1994
1.08 %
Chapter 1, Exhibit 5
0.58 %
CCH Federal Taxation Basic Principles
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Sampling of TCMP Audit
Probabilities
Taxpayer Classification
Probability
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Self-employed taxpayers with Schedule C gross receipts over $25,000.
1 in 112
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Small C corporations with assets under $10 million.
1 in 68
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Lawyers, accountants, engineers, and architects:
 Schedule C gross receipts of $150,000 to $1 million
 Partnerships, 10 or few partners, receipts over $100,000
 S corporations, assets under $200,000
1 in 51
1 in 115
1 in 239
Doctors, dentists, and other medical providers:
 Schedule C gross receipts of $150,000 to $1 million
 Partnerships, 10 or few partners, receipts over $100,000
 S corporations, assets under $200,000
1 in 79
1 in 76
1 in 212
Taxpayers who do not itemize or file supporting schedules
1 in 6,616
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Source: “When to Say No,” Laura Saunders and Janet Masters, Forbes, Oct. 9, 1995, p. 94.
Chapter 1, Exhibit 6
CCH Federal Taxation Basic Principles
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Statute of Limitations for
IRS Assessments
Time Limits
Nature of IRS Claim
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Omission of  25% income (nonfraudulent).
Excess deductions (nonfraudulent).
6 Years
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Omission of > 25% income (nonfraudulent).
Unlimited
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Fraudulent return or failure to file.
3 Years
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The SOL “clock” starts “ticking” on the filing due date or the
actual filing date, whichever is later.
Chapter 1, Exhibit 7
CCH Federal Taxation Basic Principles
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Statute of Limitation for
Taxpayer Refunds
Taxpayers may file for refunds by the later of
3 years from the date the return was filed
or
2 years from the date the tax was paid.
1.
2.
(Returns filed early are deemed to have been filed
on the filing due date.)
Chapter 1, Exhibit 8
CCH Federal Taxation Basic Principles
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Brief History of Federal Income Tax
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Income Tax Law of 1894
 2% on gains, profits, and income over $4,000
 declared unconstitutional in Pollack case
Corporation Excise Tax of 1909
 1% excise tax on corporations with net income over
$5,000
Sixteenth Amendment and the Revenue Act of 1913
 Amendment allowed Congress to enact direct tax
 Act imposed tax on net income of individuals and
corporations
 Act repealed the Corporation Excise Tax of 1909
Chapter 1, Exhibit 9
CCH Federal Taxation Basic Principles
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Tax Legislative Process
1. Tax bill is screened by House Ways and Means
Committee
2. Consideration by the House of Representatives
3. Referred to Senate Finance Committee
4. Consideration by the Senate
 Bill may be sent to Joint Conference Committee if
the House and Senate differ. Bill would then be
sent back to House and Senate for consideration.
5. Approval or veto by the President
6. Incorporation into the Code (if approved by President
or if veto is overridden)
Chapter 1, Exhibit 10
CCH Federal Taxation Basic Principles
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Objectives of the Tax Law
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Economic—to stimulate or control the
economy
Social—to encourage behavior (e.g.,
deduction for charitable contributions) or
discourage behavior (e.g., illegal kickbacks
are not deductible)
Political—to benefit one’s own constituents
or to discourage certain activities
Chapter 1, Exhibit 11
CCH Federal Taxation Basic Principles
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