Basic Federal Income Tax
The Constitution and the Income Tax
– Article I, Sec. 8 – gives Congress the power to lay and collect Taxes, Duties, Imposts, and Excises. However, it requires direct taxes to be apportioned among the states on the basis of their relative populations.
– 16th Amendment – gives Congress the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states.
Income-Tax Legislation and Regulations
– Internal Revenue Code of 1986 – as amended to date, is the law
– Section 7805(a) empowers the Treasury to issue regulations interpreting the Code (interpretive regulations)
– Legislative regulation – issued under legislation authorizing the Treasury to make rules on a particular subject.
Internal Revenue Service
– Revenue Rulings – issued by the IRS, a revenue ruling poses a legal issue concerning the interpretation of the Code (a specific topic), describes the facts that give rise to the issue, analyzes the relevant authorities, and states a conclusion
– Letter Rulings – IRS response to a taxpayer request for guidance on the tax consequences of a contemplated transaction. The taxpayer can rely on the ruling, but no one else can.
– Audit is the process by which the IRS investigates a return’s accuracy. Generally an office audit takes place in which IRS has the taxpayer come in with his records and it scrutinizes the return. If the IRS and taxpayer can’t reconcile their differences, the IRS will send the taxpayer a 30-day letter, explaining its determination. The taxpayer then has 30 days to appeal the proposed determination. If the taxpayer takes no action within the 30 days, or if agreement isn’t reached on appeal, the taxpayer will be sent a deficiency notice or 90 day letter. The taxpayer then has 90 days to pay the tax or to challenge the alleged deficiency by filing a petition with the Tax Court (no jury – decided by a single judge usually – appeal to the US C of A). If the taxpayer does neither, the Service will assess the tax and demand payment; if payment isn’t made, the Service will commence collection activity.
o Alternative to going to the Tax Court – pay the tax and then file a claim for a refund, if the refund is denied, file a suit for a refund in a US DC (get a jury trial – appeal is to US C of A)
– Government loses a case, and does not appeal – what do we infer from this?
o Government usually gives its intentions with such case by publishing an acquiescence or non-acquiescence in the case
§ Non-acquiescence – tells the tax world that the government is adhering to its position and will continue to litigate the issue as appropriate cases arise
– Golsen Rule – Tax Court need not follow C of A decisions; however, it will follow those decisions according to the Golsen Rule (Tax Court must follow SC decisions)
Taxpayers and Tax Rates
– Progressive Tax – the tax takes a greater percentage of the income of high-income people than of low-income people.
o Eg. Individual Income Tax
– Proportional Tax – when the tax, stated as a % of income, remains constant as income increases.
o Eg. Medicare portion of Wage Tax (1.45%)
ting AGI. It doesn’t create any new deductions
– Step 3 – Get from AGI to Taxable Income
o 1) Substract greater of:
§ i) Itemized Deductions (§63) OR
· Itemized Deductions are all deductions allowed by the Code except those allowed by §62 (Above the Line Deductions), the personal exemptions, and by implication the standard deduction
§ ii) Standard Deductions (§63)
· Standard Deduction = Basic Standard Deduction + Additional Standard Deduction
o Basic = 3,000 for individual, 6,000 for joint or surviving spouse, and 4,400 for Head of Household
§ A dependent’s Standard Deduction = greater of $500 or sum of $250 + earned income
o Additional (for aged and blind)
§ Each taxpayer gets additional $600 if age 65 by close of tax year and each taxpayer gets additional $600 if blind at close of tax year
§ If not married and not a surviving spouse – such amounts increase to $750
o Rationale – adds progressivity to the tax system and saves people from keeping records for little items (convenience)
o 2) Subtract Personal and Dependency Exemptions (§151)
§ Exemptions allowed as deductions in computing taxable income.
· Rationale – everyone needs some money to live on
§ Each taxpayer gets a personal exemption and additional exemptions for his dependents
§ Amount = $2,000