Federal Income Taxation
Definition of Tax is a compulsory (not voluntary) payment to a government.
Reasons we have taxes
→ The gov’t provides certain services and benefits from the taxes (of which we do not get to pick and choose).
→ Taxes are a means to further social policy goals (i.e. social security, welfare, mortgage, deduction to encourage home ownership)
→ Taxes are also used to redistribute wealth
Rate Structures
→ Progressive – The tax rate (percentage) increases with the amount of gross income. The tax rate increases as the value of the tax base increase.
→ Proportional – The tax rate stays the same (flat rate), i.e. sales tax. A tax is proportional if the tax rate remains constant for all values of the tax base.
→ Regressive – The more income you have the tax rate slopes down. A tax is regressive if the tax rate decreases as the value of the tax base increases.
→ Marginal Tax Rate – This is the rate at which the last dollar of taxable income is taxed. The amount of tax you pay divided by the amount that was includable in income.
→ Effective Tax Rate – The tax liability for the year divided by taxable income for the year. Overall percentage of your income.
IRC – Cost of Living Adjustments for 2007 (last year was 2005.7)
Look at Table 3 – Section 1(c ) – unmarried individuals
Q – what is my effective rate is in a marginal tax bracket
Ex – You have 5,000 taxable income then you would be taxed 500.00.
Ex – If you made 10,000 then what is your taxes?
Take 10,000 – 7825 = 2175 * 15% = 326.25 + 782.5 = 1,547.5
Marginal rate is 15%
Effective rate is about 10%
Ex – Say you make 100,000 then you are in a marginal tax bracket of 28%. You would pay 22,000 effective tax
Goals of Tax Law
All taxpayers to pay the proper amount of taxes;
Don’t prevent the IRS from carrying out its duties; and
→ Verification of accuracy
→ Just the possibility of hindering the IRS is breaking the law
Authority
→ Internal Revenue Code – IRC – This is primary authority.
· START HERE FIRST
· Congress enacts this an president signs a bill and give it the house to decide.
· Ex – 26 USC
o EX – IRC – 64(a)(4) – this section deals with interest
§ To determine of something is then interest we have to go to the regulations – 1.61-7 (interest).
→ Treasury Regulations
· GO HERE SECOND – this tells us more about something.
· Congress gave treasury authority to enact a regulation to provide additional guidance.
· Ex – Treasury Reg. Section 1.__-___()
o Ex – 1.67-7(a)
→ Revenue Ruling
· This are issued by the IRS and they provide specific guidance to tax payers and indented for taxpayers to rely upon and can be sited as authority in court. IRS comes up with a fact pattern and sets forth the issue and law and does an analysis and comes to a conclusion.
· Rev. Rul. 2007 – _____
o Example in book – 79
ent now takes position on return and files it with the IRS and the return gets kicked out for audit and goes to revenue agent – you try to explain to agent why what you did was correct. If you cannot work it out with the revenue agent then the agent writes up a report and you get this 30 day letter and then you have to decide whether to appeal it or accept the fines. You then write your protest letter and then go to the appeals division of revenue service. Appeals is a review of case – this is separate from audit part of IRS service. Does not have exparte communication, they get case from compliance agent. Appeals is good just to make sure of the decision to see if you can resolve the matter. If you cant get done on appeals then you have to go to court: you have three options then – look below.
→ Courts that you can go to if appeal does not work
· US Tax Court OR
o Common Choice b/c you don’t have to pay the tax liability up front when you go to court. Hearings are scheduled in various cities and a judge picks a few days every year and when they get to that city they hear they case- this is called riding the circuit. 17 tax judges with 15 year term
