Federal tax procedures encompass a complex web of rules and regulations governing the taxation of individuals, businesses, and other entities. Understanding federal tax rules and the procedures associated with them is crucial for ensuring compliance and minimising tax liabilities.
If you wish to become a CPA (certified public accountant) registered under the Association of Certified Professional Accountants (AICPA), enrol in Imarticus Learning’s CPA course.
Federal Taxation for Individuals and Entities
Let us first discuss federal taxation for individuals and entities before delving into procedures, compliance and audits.
Individual Income Tax
- Filing Requirements: Individuals must file a tax return if their income exceeds certain thresholds.
- Taxable Income: Income from various sources, including wages, salaries, self-employment income, capital gains, and investment income, is subject to federal income tax.
- Deductions and Credits: Taxpayers can reduce taxable income with the help of deductions (e.g., mortgage interest, charitable contributions) and credits (for example: education credits, child tax credit etc.).
- Estimated Taxes: Individuals with significant income from sources other than wages may need to make estimated tax payments throughout the year.
- Tax Filing and Payment: Tax returns are typically filed electronically, and taxes can be paid online or by check.
Federal Tax Rules for Businesses
- Taxable Income: Corporate income tax is levied on the net income of corporations.
- Tax Rates: Corporate tax rates vary depending on the type of corporation and its income level.
- Deductions and Credits: Corporations can claim various deductions and credits to reduce their taxable income.
- Estimated Taxes: Corporations may be required to make estimated tax payments throughout the year.
- Tax Filing and Payment: Corporations must file tax returns and pay taxes electronically.
Property Taxes
- Real Property Tax: A tax levied on real estate, including land and buildings.
- Personal Property Tax: A tax levied on tangible personal property, such as cars and equipment.
- Assessment Process: Property is assessed to determine its value, and taxes are calculated based on the assessed value.
- Payment Deadlines: Property taxes are typically due on a specific date, often twice a year.
Other Federal Taxes
In addition to federal tax rules for businesses, individuals and property, other federal taxes include:
- Payroll Taxes: Taxes on wages and salaries, including Social Security and Medicare taxes.
- Excise Taxes: Taxes on specific goods and services, such as alcohol, tobacco, and gasoline.
- Estate Tax: A tax on the transfer of assets upon death.
- Gift Tax: A tax on the transfer of property during a person's lifetime.
Other Essential Federal Tax Procedures: Tax Credits and Deductions
Tax credits and deductions are powerful tools that can significantly reduce our tax liability. Understanding and utilising these benefits can save us money.
Common Tax Credits
- Child Tax Credit: A credit for each qualifying child.
- Earned Income Tax Credit (EITC): A refundable credit for low-income working individuals and families.
- American Opportunity Tax Credit (AOTC): A credit for qualified education expenses.
- Lifetime Learning Credit: A credit for qualified education expenses, including tuition and fees.
Common Tax Deductions
- Mortgage Interest: Deductible interest paid on a home mortgage.
- Property Taxes: Deductible property taxes paid on our home.
- Charitable Contributions: Deductible contributions to qualified charitable organisations.
- Medical Expenses: Deductible medical expenses that exceed a certain percentage of our adjusted gross income.
Tax Planning Strategies
Effective tax planning can help us minimise our tax liability legally. Some strategies include:
- Timing of Income and Expenses: Strategically timing income and expenses to take advantage of tax brackets and deductions.
- Tax-Loss Harvesting: Selling losing investments to offset capital gains.
- Retirement Planning: Utilising retirement accounts like 401(k)s and IRAs to defer taxes.
- Education Savings: Taking advantage of tax-advantaged education savings accounts like 529 plans.
- Business Tax Strategies: Implementing strategies like deductions, credits, and tax-efficient business structures.
Tax Audits and Appeals
A tax audit is an examination of our tax returns by the IRS. If we receive a notice of audit, it's important to respond promptly and accurately.
Key steps to follow during a tax audit:
- Gather Documents: Organise all relevant documents, such as receipts, bank statements, and tax returns.
- Respond to IRS Requests: Respond to IRS requests in a timely and accurate manner.
- Prepare for an Audit Interview: Be prepared to answer questions from the IRS agent.
If we disagree with the IRS's findings, we may have the option to appeal the assessment. The appeals process involves several levels of review, including an initial appeal, an appeals conference, and a court hearing.
International Taxation
International taxation can be complex, especially for individuals and businesses with global operations. Key considerations include:
- Foreign Tax Credit: A credit for taxes paid to foreign countries.
- Foreign Tax Deduction: A deduction for foreign taxes paid.
- Transfer Pricing: The pricing of transactions between related parties.
- Tax Treaties: Bilateral agreements between countries to avoid double taxation.
The IRS Audit Process
The IRS may select tax returns for audit based on various factors, including discrepancies in reported income, unusual deductions, and statistical sampling. If selected for an audit, taxpayers may be required to provide additional documentation and may be subject to an interview with an IRS agent.
Tax Penalties and Interest
If taxpayers fail to file their tax returns on time or underpay their taxes, they may be subject to penalties and interest. Penalties can range from failure-to-file penalties to accuracy-related penalties. Interest is charged on unpaid taxes.
The Role of Tax Preparers
Tax preparers, such as accountants and tax attorneys, can help individuals and businesses navigate the complex tax code. They can assist with tax planning, preparation, and representation during audits.
State and Local Taxes
Other than federal taxes, individuals and businesses may also be subject to state and local taxes such as state income tax, sales tax, and property tax. State and local tax laws vary widely, so it's important to understand the specific rules and regulations in our jurisdiction.
Wrapping Up
Understanding federal tax procedures is essential for individuals and businesses to comply with tax laws and minimise their tax liabilities.
If you wish to become a certified public accountant (US), enrol in Imarticus Learning’s Certified Public Accountant course.
Frequently Asked Questions
What is the difference between a tax credit and a tax deduction?
A tax credit directly reduces our tax liability dollar-for-dollar, while a tax deduction reduces our taxable income, which in turn reduces our tax liability.
What are some common tax planning strategies for individuals?
Common tax planning strategies include timing income and expenses, maximising deductions and credits, and taking advantage of tax-advantaged retirement accounts like 401(k)s and IRAs.
How can I avoid an IRS audit?
While there's no guaranteed way to avoid an IRS audit, we can minimise our risk by accurately reporting income, claiming only legitimate deductions and credits, and keeping organised records.
What should I do if I receive an IRS audit notice?
If we receive an IRS audit notice, it's important to remain calm and seek professional advice from a tax advisor. Pay attention to the notice, and be prepared to provide documentation to support our tax return.
