1. Tax background concepts:

My Philosophy

Taxes are critical to the existence of organized government. They are the price we pay for civilization. The purpose of any tax system is to raise necessary public revenue from the unwilling individuals who comprise that public. Taxes are a necessary evil. Tax systems should be evaluated on how well they:
 

1. Raise reliable amounts of revenue

2. Have a small cost of collection

3. Treat similarly situated taxpayers in a similar way

(sometimes referred to as "horizontal equity")

4. Burden taxpayers according to ability to pay

(sometimes referred to as "vertical equity")

5. Not discourage or distort economic activity,and

6. Allow taxpayers to predict the tax results of their activities.

Industrialized countries have generally adopted taxes on income, because these taxes can reliably raise enormous amounts of revenue with a relatively small collection cost. But there are other ways:

Types of Taxes: Comparative analysis

Income

Sales (really, consumption)

Wages

Wealth

2. Source of tax rules: the Tax Code

frequent revision / addition and updates

The two basic questions for a tax advisor:

What does the code say?

What does the code mean?

Look to Regs. and Cases
Look for Principles and policy
 
More recent provisions tend to be more code driven
not old enough to build up case interpretations
Often use legislative history: statements in committees and congress -- to interpret recent provisions

Code interpretation: very precise and literal:

Tp's and Comm'r both able to rely on language

Very algorithmic
Can be veiwed as an extremely complex exercise in pure logic,
which happens to have money consequences

Language often like software

statements make no sense individually
A maze of cross references and defined terms
Courts may snarl literalism by referring to policy or legislative intent
 

 

3. Tax and Financial Accounting compared

Similarities

Both systematize economic transactions, classify the transactions and apply various formulas (algorithms) to get a result. presented in a standard format

Differences

tax joins law to accounting: words and numbers combined

3 types of certified professionals are involved with taxes: Attorneys, CPA's, EA's

income tax applies to a mass public, not just business organizations

tax is adversarial, not detached impartiality

• Tax is about real money, not just information transmission
• Touchstone not "fairly presents" but "under perjury, true, correct and complete"
• Tax has higher level of detail (sometimes mindnumbing complexity)
• Tax accounting isn't "conservative"
• The sources of tax rules are political as well as technical

Planning and compliance

compliance: try to fit ##'s from past facts to required reports

planning: make transactions fit favorable rule pattern

avoid unfavorables
no "patriotic duty"

Tax avoidance  vs. tax evasion

Evasion is criminal: reduce tax by lies,  false records,
 
• Avoidance is legal and (often) proper: lowering tax by means the law allows, but not fake or hollow manuevers
• Avoidance is usually proper: government may be trying to use taxes to affect behavior
• Avoidance prevents government from overburdening enterprises: Tax Criteria 5
 
 

4. The Players in the game

Taxpayers and their representatives

Individuals
Business Entities (domestic and foreign)
The "Paid Preparer"

The Rule Makers: Congress

Note that Congress (w/ president as player due to veto) needs to raise $$ to run government, but is elected by the people they tax.

Key is House Ways & Means Committee, where tax bills originate
 
 

The Law-Enforcers: the IRS

Four main functions: implementing rules, get information, verify it, collect tax
IRS shares in the rule-making power: Regulations, Revenue Procedures and Rulings, Letter Rulings

Returns processing at regional service centers and Nat' Computer center
A weak link, esp with the problem of transcription from paper

Verification by information report matching in computer system and by spot checks ("audits" or "examinations") to maintain a presence

Enforced Collection by withholding, lien and levy

The Dispute-Deciders: Federal Court system

Internal IRS appeals office for case review to avoid expense and time of court

Choice of Tax Court or Federal District Court (or Claims Court)

Appeals to Circuit Courts of Appeal (geographic)

Rare case to Supreme Court