Tax I Chapter 1

Proportional

A tax is ___________ if the rate of tax remains constant for any given income level. Examples of proportional taxes include most excise taxes, general sales taxes, and employment taxes (FICA and FUTA).

A Tax Base

is the amount to which the tax rate is applied.

Gift Tax

A tax imposed on the transfer of property by gift. The tax is imposed upon the donor of a gift and is based upon the fair market value of the property on the date of the gift. §§ 2501-2524.

Occupational Fees

A tax imposed on various trades or businesses. A license fee that enables a taxpayer to engage in a particular occupation.

Severance Tax

A tax imposed upon the extraction of natural resources.

Progressive

A tax is ____________ if a higher rate of tax applies as the tax base increases. The Federal income tax, Federal gift and estate taxes, and most state income tax rate structures are progressive.

Franchise Tax

A tax levied on the right to do business in a state as a corporation. Although income considerations may come into play, the tax usually is based on the capitalization of the corporation.

Excise Tax

A tax on the manufacture, sale, or use of goods or on the carrying on of an occupation or activity. Also, a tax on the transfer of property. Thus, the Federal estate and gift taxes are, theoretically, excise taxes.

Pay-as-you-go

an income tax system requires employers to withhold for taxes a specified portion of an employee's wages. Persons with income from other than wages may have to make quarterly payments to the IRS for estimated taxes due for the year.

Negligence Penalty

A ___________ of 20 percent is imposed if any of the underpayment was for intentional disregard of rules and regulations without intent to defraud.

Value Added Tax (VAT)

A national sales tax that taxes the increment in value as goods move through the production process. A VAT is much used in other countries, but has not yet been incorporated as part of the U.S. Federal tax structure.

Failure to Pay

A penalty for __________ the tax due as shown on the return is imposed in the amount of .5 percent per month up to a maximum of 25 percent. Again, any fraction of a month counts as a full month.

Failure to File

A penalty for ____________ a tax return by the due date (including extension), a penalty of 5 percent per month up to a maximum of 25 percent is imposed on the amount of tax shown as due on the return. Any fraction of a month counts as a full month.

Estate tax

A tax imposed on the right to transfer property by reason of death. Thus, an estate tax is levied on the decedent's estate and not on the heir receiving the property. §§ 2001 and 2002. See also inheritance tax.

Sales Tax

A transaction tax imposed upon the sale of goods. It usually is based on a specified percentage of the value of the property sold. A sales tax differs from an excise tax, in that a sales tax applies to a broad variety of commodities.

FICA Tax

An abbreviation for Federal Insurance Contributions Act, commonly referred to as the Social Security tax. The FICA tax is comprised of the Social Security tax (old age, survivors, and disability insurance) and the Medicare tax (hospital insurance) and is imposed on both employers and employees. The employer is responsible for withholding from the employee's wages the Social Security tax at a rate of 6.2 percent on a maximum wage base of $117,000 (for 2014) and the Medicare tax at a rate of 1.45 percent (no maximum wage base). The employer is required to match the employee's contribution. See also employment taxes.

Field Audit

An audit by the IRS conducted on the business premises of the taxpayer or in the office of the tax practitioner representing the taxpayer. To be distinguished from a correspondence audit or an office audit.

Office Audit

An audit by the IRS of a taxpayer's return that is conducted in the agent's office. To be distinguished from a correspondence audit or a field audit.

Correspondence Audit

An audit conducted by the IRS by mail. Typically, the IRS writes to the taxpayer requesting the verification of a particular deduction, exemption, or credit. The completion of a special form or the remittance of copies of records or other support is all that is requested of the taxpayer. To be distinguished from a field audit or an office audit.

FUTA Tax

An employment tax levied on employers. Jointly administered by the Federal and state governments, the tax provides funding for unemployment benefits. FUTA applies at a rate of 6.0 percent on the first $7,000 of covered wages paid during the year for each employee in 2014. The Federal government allows a credit for FUTA paid (or allowed under a merit rating system) to the state. The credit cannot exceed 5.4 percent of the covered wages. See also employment taxes.

Inheritance tax

An excise tax levied on the heir based on the value of property received from a decedent. See also estate tax.

Adam Smith identified the following canons of taxation

Equality, Convenience, Certainty, and Economy

Flat Tax

In its pure form, it would replace the graduated income tax rates with a single rate (e.g., 17 percent). All deductions are eliminated, and a large personal exemption is allowed to remove low-income and many middle-income taxpayers from the application of the tax.

Criminal Fraud

In the case of ___________, the penalties can include large fines as well as prison sentences.

Civil Fraud

In the case of ____________, the penalty is 75 percent of the underpayment attributable to fraud.

Taxable Income

In the case of the Federal income tax, the tax base is

National Sales Tax

Intended as a replacement for the current Federal income tax. Unlike a value added tax (VAT), which is levied on the manufacturer, it would be imposed on the consumer upon the final sale of goods and services. To keep the tax from being regressive, low-income taxpayers would be granted some kind of credit or exemption.

Statute of Limitations

Provisions of the law that specify the maximum period of time in which action may be taken on a past event. Code §§ 6501-6504 contain the limitation periods applicable to the IRS for additional assessments, and §§ 6511-6515 relate to refund claims by taxpayers.

Employment taxes

___________ are those taxes that an employer must pay on account of its employees. Employment taxes include FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act) taxes. Employment taxes are paid to the IRS in addition to income tax withholdings at specified intervals. Such taxes can be levied on the employees, the employer, or both. See also FICA tax and FUTA tax.

Transaction

____________ taxes, which characteristically are imposed at the manufacturer's, wholesaler's, or retailer's level, cover a wide range of transfers.