A Beginners Guide to Taxes
Congress, the lawmaking branch of the main government, usually writes the Internal Revenue Code (IRC), which is also commonly referred to as the tax code. The tax code normally directs the implementation of the tax rules, the issuance of tax refunds and the collection of taxes. The Internal Revenue Service (IRS) is the government agency under the U.S. Department of Treasury tasked with carrying out all these functions.
But is the Tax Code Interpreted?
The normally IRS interprets tax requirements through IRS regulations, which gives guidance on the application of tax law. And because not every single tax code has a rule, the IRS also uses revenue procedures, revenue rulings, and even letter rulings to provide guidance. Even though the IRS can provide its own understanding of the tax code, when an argument arises it is the responsibility of the federal court system (a section of the judicial branch of the main government) to clarify the tax code and to finally decide how Congress envisioned its application.
How Does the U.S Government Use Taxes?
The government usually collects payroll taxes, income taxes, real estate taxes and sales taxes from companies and individuals. The government distributes the money, in line with its budget, to the relevant agency to use for various purposes like national parks, Social Security, national defense, education, and for government services like welfare.
How Does the U.S Government Collect Income Taxes?
The government basically gets most of its revenue for its budget through the income taxes. The systematic collection of income taxes takes place throughout the year by withholdings from an individual’s paychecks. At the end of every year, individuals that earned income must always file a tax return to decide whether the government collected sufficient taxes through withholding or whether it owes an individual a refund for paying excess tax.
What exactly is Taxable Income?
Well, there actually two types of income that are subject to taxation: unearned and earned income. Earned income basically includes:
Unearned income subject to tax includes:
It is possible to lessen taxable income by simply contributing to a retirement account such as an IRA or 401(k).
What are Allowed Deductions?
The U.S government permits the deduction of certain types of expenses from an individual’s adjusted gross income, or rather gross income minus adjustments. An individual can exclude some of his or her income from taxation by just using a standard deduction amount defined by the government and an individual’s filing status or even by listing particular types of expenses. Allowable listed expenses actually include state and local taxes, mortgage interest, medical expenses and charitable contributions. To better understand it is crucial that you find a tax professional to walk you through every step.
Nature of IRS penalties
Generally, people feel anxious and uneasy when faced with possible IRS penalties such as the payment of back taxes. Unbeknownst to them, there are in fact procedures and guidelines that will greatly help them deal with these issues. These basically include consultations and setting up of installment plans, all focused on ultimately dismissing probable back taxes and penalties.
To review, the relevant taxpayers may be obliged to suffer IRS penalties in circumstances such as incorrectly filing of taxes, not filing tax returns, deceiving the IRS and not disbursing quarterly taxes. To get comprehensive information on the full list of penalties, including the whole processes on penalty assessment and abatement, you may simply refer to the IRS Penalty Handbook. It becomes very clear then that apart from the episodic collection of taxes, the government also makes money through the interests collected from felonious taxpayers.
The government normally provides taxpayers with numerous courses of action hence making the entire process of dismissing tax levies fairly easy because it simply wants to be certain that penalties valuation is carried out in the correct manner. Compared to the despicable battle it once was, the entire process is today friendlier.
Taxpayers are always educated with the basics of levies, interests and even penalties abatement whenever they make time to surf through the IRS Penalties Manual. With this important set of information, the many risks of being penalized are considerably decreased.
One of the main benefits of the IRS Penalty Policy Statement is that IRS penalties are today technically not automatic. In fact, you may qualify for a cancellation of all or even some of your IRS tax penalties if only you can prove that there was actually no deliberate neglect and aim of deceiving the IRS on your part. When this occurs, it is normally referred to as an IRS abatement of penalties.
The IRS essentially makes more than $15 billion, on the average, from collection of penalties alone. In addition to the fact that the IRS makes a significant amount of money from this, the fact still remains, this is too heavy a load for all the taxpayers.
What worsens circumstances for most individuals is that when they are given a penalty, that amount normally gets added to the overall amount of tax debt. Therefore, the new larger sum immediately becomes the basis of the interest. Don’t forget that the interest that the IRS charges on any tax debts is usually pretty big with some levels going as high as 25%. Within a short period of time, this can actually double or triple the overall amount of debt, hence making it considerably more difficult for the taxpayer to fully settle the whole amount.
The moment you receive an IRS notice indicating a possible problem resulting from tax dues, make sure you immediately respond and request them to cancel all the penalties. This action actually indicates the commencement of the penalties abatement process, which is in fact a right that all taxpayers can take. If verified that you indeed did not deliberately defraud the IRS, then the "good faith exception clause" outlined in the provisions of IRS penalties can be used. In summary, in spite of the fact that IRS penalties pose a great threat to you and even to your assets, their effects can sometimes be neutralized, if not completely eliminated, through the use of legal means.
I believe that you really want to understand the basics and guidelines provided by IRS. I’m here for you. With several years of experience as a tax preparer and accountant, you can be sure that I will take you step by step through every detail.
Williams Tax & Bookkeeping