Chapter 1: an Introduction to Taxation and Understanding the Federal Tax Law
Purpose of taxation – to raise money for government operations.
Government at a levels (national, state, local) require funds for defense, protection
(fire & police), education, roads, the court system social services and more
-Also, used as a tool to influence the behavior of individuals and businesses.
Taxation is crucial for accounting and financial professionals
-compliance
-planning
Financial reporting
Controversy
Cash management
Data analysis
Much of taxation is TRANSACTION-BASED.
How a transaction is structured has varying tax consequences
16th Amendment (2/3/1913)
After the 16th amendment, congress enacted the Revenue Act of 1913. – First Form 1040 was
due on 3/1/1914. This law allowed various deductions and personal exemptions based on
marital status
= all these revenue laws were codified into the INTERNAL REVENUE CODE
TRENDS
Income tax is a major source of revenue for the federal government
Current Tax Payment Act – pay-as-you-go tax system requires employee’s wages
and remit them to the government to cover the worker’s income taxes
Tax System Design
The Congress have the power to lay and collect taxes
o The consititution provided some limits on this taxing power of Congress,
which led to enactment of the Sixteenth Amendement to allow for an
income tax
Basic Tax Formula: Tax Base X Tax Rate = Tax Liability
Fixed tax rates: sales tax, gasoline excise tax
Progressive tax rates:income tax
Tax Principles to consider wgen evaluating a particular tax structure
Equity
Certainty
Purpose of taxation – to raise money for government operations.
Government at a levels (national, state, local) require funds for defense, protection
(fire & police), education, roads, the court system social services and more
-Also, used as a tool to influence the behavior of individuals and businesses.
Taxation is crucial for accounting and financial professionals
-compliance
-planning
Financial reporting
Controversy
Cash management
Data analysis
Much of taxation is TRANSACTION-BASED.
How a transaction is structured has varying tax consequences
16th Amendment (2/3/1913)
After the 16th amendment, congress enacted the Revenue Act of 1913. – First Form 1040 was
due on 3/1/1914. This law allowed various deductions and personal exemptions based on
marital status
= all these revenue laws were codified into the INTERNAL REVENUE CODE
TRENDS
Income tax is a major source of revenue for the federal government
Current Tax Payment Act – pay-as-you-go tax system requires employee’s wages
and remit them to the government to cover the worker’s income taxes
Tax System Design
The Congress have the power to lay and collect taxes
o The consititution provided some limits on this taxing power of Congress,
which led to enactment of the Sixteenth Amendement to allow for an
income tax
Basic Tax Formula: Tax Base X Tax Rate = Tax Liability
Fixed tax rates: sales tax, gasoline excise tax
Progressive tax rates:income tax
Tax Principles to consider wgen evaluating a particular tax structure
Equity
Certainty
