IntroductionTypes of Taxes1) Property Taxes  ad valorem tax based on property valueTax AdministrationIRS – administers Fed tax law; commissioner of IRS appointed by presidentIntroductionHistory1861: First federal tax to raise $ for Civil War -- after war tax was repealed1894: Individual income tax enacted but held unconstitutional in Pollock case1909: First corp. tax  corporations were legal entities, not people so not unconstitutional 1913: 16th Amendment allowing corp + individual income taxes3/1/1914: First 1040 due 2% - 6% rates1939: First Internal Revenue Code1954: IRC revised1986: IRC revisedTax Rates:Proportional  rate of tax remains constant (i.e., flat tax)Progressive  higher rate of tax as income RegressiveTypes of Taxes1) Property Taxes  ad valorem tax based on property valuea) realty  mostly by localitiesb) personality  all assets not realty – tangible or intangible2) Transaction Taxesa) Fed. excise taxes – tobacco, gas, telephone use + state prices of products include taxb) Sales tax – covers multitude of products whereas excise is specific (e.g., 6% on all retail sales not incl. in price; use tax – prevents avoidance of sales taxon use, consumption or storage of tangible no sales tax in Alaska, DE, Montana, NH, Oregonc) Death tax – tax on the right to transfer property or receive property upon deathof the owner Estate tax/Inheritance taxd) Gift tax – tax imposed on transfer of property before owner dies – annual exclusion = $10,000 3) Income TaxFederal State – no income tax in Alaska, FL, NE, SD, TX, WA, WYLocal 4) Employment Taxes Employees  Fed. Insurance Contribution Act (FICA): 6.2%Medicare: 1.45%Employers  Fed. Unempl. Tax Act (FUTA): 6.2% 5) Other Taxes- Customs DutiesMarginal – tax rate last $ is taxede.g. T/I for 2001= 100,000 joint marginal = 25% average = 100,000 – 58,100 = 41,900 18475  100K = 18.5% x 25% 10475 + 8000 22,124 Federal Tax Law Considerations: 1) Revenue Needs cover cost of gov’t operations2) Economic Considerations- encourage purch of assets w/deprec. + Sec. 179 deduction- encourage certain types of activity e.g.:R + D credit  tech. advancesOrphan Drug Credit  drugs for rare diseasesFSC  profits from some export sales tax exemp.Retirement plans not taxed-encourage small business – S corp. avoidscorp. income tax-house purchase  mortg interest deduction3) Social Considerations- group term life ins. benefits paid for employee not taxable- charitable contrib. deductions- mortgage interest  spurs housing market- child care credit  getting parents to work- student loan deductions  encourages education4) Equity Considerations- alleviate double tax – state/local inc tax deduction, foreign tax credits, tax treaties- wherewithal to pay concept (e.g., sale of principal residence)5) Political Considerations- special interest litigation6) IRS – protector of revenue7) Courts  judicial conceptsTax AdministrationIRS – administers Fed tax law; commissioner of IRS appointed by presidentA) Audit Process1) Selection of returns  statistical sampling used - some selected for high AGI’s, self-employed, cash businesses- random selection by Taxpayer Compliance Measuring Program (TCMP)- informers – IRS pays rewards up to 15% of taxes/fines/penalties collectedB) Types of Audits1) Correspondence Audit – via letter2) Office (at IRS) or Field Audit (at business)Revenue Agent’s Report (RAR) issued at end of audit Appeals may be made to IRS Appeals DivisionSecond appeal would be to litigate in Tax CourtC) Statute of Limitations 3 yrs from due date of returnIf gross income omission > 25%  6 year statuteNo return or fraud  no statuteD) Interest + PenaltiesInterest  begins on due date of returnPenalties: 1) failure to file 5%/mo. up to 25% max 2) failure to pay .5%/mo. up to 25% max 3) negligence (not fraud) 20% (intentional