What is ‘Taxes’
Taxes are generally an involuntary fee levied on individuals or corporations that is enforced by a government entity, whether local, regional or national in order to finance government activities. In economics, taxes fall on whomever pays the burden of the tax, whether this is the entity being taxed, like a business, or the end consumers of the business’s goods.
BREAKING DOWN ‘Taxes’
Taxes are levied by states upon their citizens and corporations to fund public works and services. Payment of taxes at rates levied by the state is compulsory, and tax evasion, the deliberate failure to pay one’s full tax liabilities, is punishable by law. Most governments utilize an agency or department to collect taxes; in the United States, this function is performed by the Internal Revenue Service.
There are several very common types of taxes:
- Income Tax (a percentage of individual or corporate earnings filed to the federal government)
- Sales Tax (taxes levied on certain goods and services)
- Property Tax (based on the value of land and property assets)
- Tariff (taxes on imported goods imposed in the aim of strengthening internal businesses).
However, tax systems vary widely among nations, and it is important for individuals and corporations to carefully study a new locale’s tax laws before earning income or doing business there.
Like many developed nations, the United States has a progressive tax system by which a higher percentage of tax revenues are collected from high-income individuals or corporations rather than from low-income individual earners. Taxes are imposed at federal, state and local levels. Generally speaking, the federal government levies income, corporate and payroll taxes, the state levies sales taxes, and municipalities or other local governments levy property taxes. Tax revenues are used for public services and the operation of the government, as well as the Social Security and Medicare programs. As baby boomer populations have aged, Social Security and Medicare have claimed increasingly high proportions of the total federal expenditure of tax revenue. Throughout United States history, tax policy has been a consistent source of political debate.
Capital gains taxes are of particular relevance for investors. Levied and enforced at the federal level, these are taxes on income that results from the sale of assets in which the sale price was higher than the purchasing price. These are taxed at both short-term and long-term rates. Short-term capital gains (on assets sold less than a year after they were acquired) are taxed at the owner’s normal income rate, but long-term gains on assets held for more than a year are taxed at a lower rate, on the rationale that lower taxes will encourage high levels of capital investment.
What is the ‘Internal Revenue Service – IRS’
The Internal Revenue Service (IRS) is a U.S. government agency responsible for the collection of taxes and enforcement of tax laws. Established in 1862 by President Abraham Lincoln, the agency operates under the authority of the United States Department of the Treasury, and its primary purpose includes the collection of individual income taxes and employment taxes. The IRS also handles corporate, gift, excise and estate taxes. People colloquially refer to the IRS as the “tax man.”
BREAKING DOWN ‘Internal Revenue Service – IRS’
Headquartered in Washington, D.C., the IRS is an expansive organization that services the taxation of all Americans. For fiscal year 2014, the IRS
processed nearly 147.5 million personal income tax returns and more than 2.2 million corporate income tax returns. These types of returns brought the federal government close to $2 trillion of revenue.
Individuals and corporations have the option to file income returns electronically thanks to computer technology, software programs and secure Internet connections. During the 2015 tax filing season, more than 91% of all returns came through this e-file option, which comes to more than 128 million out of 150 million returns from January to October 2015. The number of returns that use e-file has grown steadily since the IRS began that program. By comparison, 40 million out of 131 million returns, or just 31%, used the e-file option in 2001. More than 128 million taxpayers received their returns through direct deposit rather than a traditional paper check in 2015, and the average direct deposited amount was $2,935.
As part of the enforcement mission of the IRS, the agency audits a select portion of income tax returns every year. For the 2013 tax year, the agency audited approximately 1.4 million income tax returns, or 0.7% of all returns filed. This number breaks down to 0.9% of individual income tax returns and 1.3% of corporate tax returns. Around 71% of IRS audits occur through the mail, while 29% happen in the field.
After rising to a peak in 2010, the number of audits has steadily declined. The amount of funding set aside for tax enforcement declined 5% from 2014 to 2015, which indicates even fewer audits should occur. Reasons for an IRS audit vary, but some factors may increase the odds of an examination. Someone who makes more than $200,000 in one tax year has a 2.71% chance of having an audit. One out of every 13 returns of those earning more than $1 million per year undergo an audit.
Other red flags for an audit include failing to declare the right amount of income, claiming a higher-than-normal amount of deductions, running a small business as self-employed, making large charitable donations compared to income and claiming rental losses. There is no one single factor that determines who does or does not face an IRS audit each year.
Staff, I. (2016, June 05). Taxes. Retrieved July 24, 2017, from http://www.investopedia.com/terms/t/taxes.asp
Staff, I. (2003, November 23). Internal Revenue Service – IRS. Retrieved July 24, 2017, from http://www.investopedia.com/terms/i/irs.asp