The first income tax was in 1862 in order to support the Civil War (Both sides collected income taxes).  Corporations were always taxed.  When the war was over the taxing ended.  In 1913 the 16th amendment was passed allowing federal taxation.  Tax laws were organized into the internal revenue code in 1939.  It was rewritten in 1954 and again in 1986.  We now operate under the 1986 code as amended.

Types of tax:

Property tax (state and county) such as a licence plate tag.
Transaction tax – sales, excise, use tax (when bringing something into the state).
Death tax – first $600,000 not taxed
Gift Tax – first $10,000 per person per year not taxed.  Gifts are not income and they can be made to anybody.
Employment taxes
 FICA = Social Security (7.65% up to a limit over $50,000 each year)
 FUTA = Unemployment (6.0% maximum)
SUTA = customs – import and export taxes not used for revenue just regulation
Income tax.

Income tax is a pay as you go concept (government takes it out as you earn it) (withholding)

Piggyback concept – Federal tax is followed by state tax

Audits:

Audits are random.
 Flag system – they come specifically after you.  Computers pick up differences in each years return.  If it is too far off the norm you get flagged.

Types of audits:
 Correspondence (through mail only)
 Office (they call you into their office)
 Field (they come out to your place.  Common in large business or to check on your “in home office”

They generally can not go back more than three years from the latter of April 15th or when you filed.  If you omitted income they can go back 6 years.  Fraud goes back forever (criminal fraud).

Under tax law you are guilty until proven innocent.

Criminal fraud goes under criminal law – not tax law.

Penalties in interest, interest changes.  Late payments = ½ of 1 percent per month.  Late returns = 5% per month.

Reasons for taxes:

Revenue, social, economic, equity, political.
 Equity (fairness) – Progressive tax, estate taxes
 Social – Encouraging home ownership, Taxing cigarettes

The court system has a lot of influence on our tax system.

Tax Code written by congress:

Congressional Committee reports – declares what the law is trying to accomplish (not always the whole story). Printed in a cumulative bulletin.

Tax law must be started in the House of Representatives (not Congress).  Then it goes to the House Ways and Means committee.  The chair of this committee has the most tax power (this guy is currently a Republican (Bill Archer 7th District, Texas)).  From there it goes back to the House, then to the Senate, then to the finance committee.  (A joint committee is a few members of the house and a few from the senate that compromise).  Once it gets passed, it becomes part of the code.  This is the Legislative process.  The 1986 reform took 8 years to pass.

Administrative (executive branch) side – Treasury department (IRS) issue regs – Regulations (for most tax issues look at the code or the regs).  Interpretive regs are the most common.  These are found in the cumulative bulletin along with temporary (proposed) regs, procedural regs, and legislative regs.

Ways to work with the tax law:
 Code – most important
 Regs
 Other tax court cases
 Tax journal – least important

Misc:

Tax avoidance is legal tax planning.  Tax evasion is fraud.

Supreme Court will rarely hear tax matters

Amounts are realized when the transaction occurred; recognized when it becomes taxable.

Marginal tax rate – the tax rate on the last dollar earned

Average tax rate - whatever your average is (in percent)

The marginal rate is used for financial planning

All dividends and interest are taxed at the marginal rate

Capital gains tax – when you sell asset. (This is why some people hold on to assets until they die)

Estate tax – tax on property owned at one moment of time

Income tax - tax on income earned over period of time

There is income tax on individuals, Estates, Trusts, Corporations