Chapter 1 Introduction to Federal Taxation and Understanding the Federal Tax Law

Topics: Tax, Taxation in the United States, Taxation Pages: 12 (1850 words) Published: February 3, 2013

Chapter 1
Introduction to Federal Taxation and
Understanding the Federal Tax Law



The majority of dollars collected by the U.S. government come by way of corporate taxation. Prior to the Sixteenth Amendment direct taxes were illegal.
All U.S. taxes are based on an individual’s income.
Customs taxes are imposed on exports to protect our natural resources from leaving the country. Also, some states tax natural resources, and some countries restrict and tax the amount of natural resources leaving their country.

Property taxes are a major source of revenue for the federal government. The value-added tax is an example of an indirect tax that is similar to sales taxes. The U.S. federal tax system is a self-assessment tax collection system. The Sixteenth Amendment gave Congress the right to tax all income from whatever source derived. The current tax system can be classified as “pay-as-you-go.” Since 1913, changes in the tax laws have always increased individual tax rates, never decreased them. Tax avoidance is discouraged as being anti-American.

A regressive tax structure is one in which the average tax rate increases as the tax base decreases. Another name for a flat tax is a progressive tax.
Stamps purchased to enable postal delivery services are an example of user fees. An equitable tax system is a fair tax system.
The Sixteenth Amendment to the U.S. Constitution gives Congress the power to lay and collect taxes on incomes from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.

Most state and local property taxes use a single tax rate, making them a type of ad valorem tax. A system whereby income taxes are withheld systematically from current wages can be referred to as a “pay-as-you-go” system.

Tax avoidance can be the sole business purpose for a transaction. Tax avoidance should be at the top of every taxpayer’s list for tax planning. The doctrine of separation of powers refers to the relationship between the Internal Revenue Service and the Treasury Department.

Revenue legislation begins in the Senate.
All relevant taxes, including state, local and foreign income taxes, as well as employment and other taxes, must be taken into consideration when computing the tax effects of any proposed transaction. Once taxable income has been calculated, the taxpayer’s regular tax liability is computed using the progressive income tax rates; however, different tax rates apply to corporate and individual taxpayers. A partnership is taxed as a separate entity.

Flow-through entities do not pay tax on taxable income, so it is not necessary for them to keep track of their gross income.
Upon examination of a tax return, the IRS has the authority to impose additional taxes and penalties.

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Chapter 1


CCH Federal Taxation—Comprehensive Topics

28. To be guilty of tax evasion, you must:
a. Try to maximize profits.
b. Try to minimize your tax liability.
c. Arrange your affairs so as to keep your taxes as low as possible. d. Refuse to disclose a tax liability based on a completed transaction. 29. The major source of federal tax revenue is:
a. Corporate income tax
b. Individual income tax
c. Excise tax
d. Estate tax
30. Since 1980, the group of taxpayers whose tax burden has increased the most is: a. Individuals
b. Corporations
c. Trusts and estates
d. None of the above
31. The most popular form of doing business in the United States is: a. Corporate form
b. Partnership form
c. Single proprietorship
d. S corporation
32. The IRS levies penalties for which of the following:
a. Bouncing checks
b. Fraud
c. Late filing
d. All of the above
33. The ultimate source of power to tax resides with the:
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