2. Taxes are a necessary part of life in the United States.
“Taxes are what we pay for civilized society” Oliver Wendell Holmes Jr., 1904
Taxes are a necessary part of life in the United States.
Although taxation has often received a less than favorable review by
taxpayers, the benefits of taxation are positive.
What do you think is meant by this quote? Do you agree with it?
(Answers will vary.)

3. Taxes Fund Public Goods and Services
Health Care for Elderly
National Defense
Social Services
Taxes are required payments of money to various levels of government.
Taxes provide revenue for public goods and services that benefit the
community and the nation as a whole.
Taxes help support goods and services such as our national defense, state and local police and protection agencies, health care, public education, financial aid for the disabled and unemployed, and social services for low-income families.
The amount of revenue raised by taxes determines the amount of
services the government can afford to provide.
State and Local Police
Public Education
Financial Aid

4. The Power to Collect Taxes
American Revolution
caused debt
Tax was necessary
to pay debt
Article 1, Section 8 of
the U.S. Constitution
granted Congress
power to tax
The American Revolution put our nation in a great deal of debt.
To pay this debt and to meet the needs of the United States citizens, the
framers of the Constitution in Article 1, Section 8, granted Congress the
powers to tax.

5. The Federal Government Dollar- Where It Comes From
Personal
Income Taxes
43%
Social Security, Medicare,
and Unemployment and other Retirement Taxes
36%
Excise, Customs, Estate, Gift, and Miscellaneous Taxes 7%
The income tax is the most significant means of raising revenue in the
federal government.
Payroll taxes, such as Social Security, Medicare, unemployment, and
other retirement taxes (FICA), account for the second largest source of
federal revenue through taxation.
Excise, estate, gift, and corporate income taxes, as well as customs,
borrowing to cover deficit, and miscellaneous taxes raise the rest of the
revenue needed by the federal government
Corporate
Income Taxes
13%
Borrowing to
Cover Deficit 6%

6. The Federal Government Dollar- Where It Goes
Medicare, and
other Retirement
32%
Homeland Security 1%
DOD Military
19%
Social Security, Medicare, and other retirement programs make up
the largest payout by the federal government. These programs
Provide income support for the retired and disabled and medical
care for the elderly.
National defense, veterans, and foreign affairs are another
expenditure. Money is provided to equip, modernize, and pay our armed
forces and to fund other national defense activities.
A portion of this funding is allotted for veteran’s benefits and services. About 1 percent of this money is given to foreign countries and United States embassies abroad to provide military and economic assistance and maintenance.
Social programs, such as Medicaid, food stamps, aid to families with
dependent children, health research, public health programs, assisted
housing, and social services are funded by revenue raised by taxes.
Law enforcement, general government activities (including the collection
of taxes), judicial activities, and prisons account for a small percentage
of expenditures.
Social Security
21%
Other
19%
Net Interest on
the Debt 7%

7. How Taxes Evolve
House Ways and Means Committee
Full House
Senate Finance Committee
Full Senate
Joint Conference Committee
The U.S. Constitution describes a formal tax legislation process. A
proposed tax law, called a bill, follows specific steps, beginning in the
Ways and Means Committee of the House of Representatives. After a
tax bill is approved by both the House and the Senate, it goes to the
President, who can either sign the bill into law or veto it.
The tax bill is initiated in the House of Representatives and referred
to the Ways and Means Committee. When members of this
committee reach agreement about the legislation, they write the
proposed law.
The bill goes to the full House, where it is debated, possibly
amended, and eventually approved.
The bill goes to the Senate, where it is reviewed and often rewritten
by the Finance Committee. The committee’s version is then
presented to the full Senate.
After the Senate approves the bill, it is sent to a joint committee of
House and Senate members, who try to arrive at a compromise
version.
The compromise version of the bill is sent to both the House and the
Senate for approval.
After Congress passes the bill, it goes to the President, who can
either sign it into law or veto it.
If the President vetoes the bill, Congress may try to override the veto
with a two-thirds vote of each house. If this vote succeeds, the bill
becomes law without the President’s signature.
Senate/House Compromise bill
President vetoes bill
President signs bill
Veto override fails
Veto override passes
Tax law enacted

8. Voluntary Compliance
Each person is responsible for filing a tax return.
In the United States, taxation operates under a system of
voluntary compliance.
Simply stated, this means that taxpayers are responsible for declaring all
of their income.
It is also the responsibility of taxpayers to obtain necessary forms and
instructions, provide complete information, and file their returns on time.
Unless each taxpayer declares and pays his or her fair share,
government services will suffer and honest taxpayers will end up
paying more.

9. Tax Avoidance versus Tax Evasion
Tax Evasion: Failure to pay legally due taxes
Tax Avoidance: Legal means of decreasing
your tax bill
Two issues involved with voluntary compliance are tax evasion and
tax avoidance.
Tax evasion is the failure to pay legally due taxes.
In this form of underground economy, people fail to report income to the government.
This reduces the government’s revenue and the filer’s tax bill. This form of tax cheating is difficult to measure.
It is estimated that taxpayers voluntarily pay only 80 percent of their legally owed taxes.
Tax avoidance is a legal means of decreasing your tax bill.
Examples of tax avoidance would be moving a business to a state with lower taxes, taking advantage of tax loopholes, or changing spending habits to avoid paying tax on certain items.
The distinction between tax avoidance and tax evasion is knowing and
taking legitimate deductions and credits when appropriate.

10. Taxpayer Rights Information on taxpayer returns is private
Taxpayers have the right to appeal an
IRS decision
Taxpayers have the right to privacy. Information on returns is private and
confidential and can only be examined by authorized tax personnel.
Taxpayers have the right to appeal an IRS decision through the IRS
or a court.

11. “The income tax law is a lot of bunk
“The income tax law is a lot of bunk. The government can’t collect legal taxes from illegal money.”
Failure to pay legally owed taxes can result in fines or imprisonment for
tax fraud or tax evasion.
Al Capone, a man remembered as one of the most notorious criminals of the twentieth century, was imprisoned for tax evasion in June, 1930.
Spiro Agnew, our thirty–ninth vice president (1969–1973), resigned from office after being fined for tax evasion.
Be smart: Pay all taxes owed to the government!
Photo Credit: National Archives
Al Capone

13. Congress has set a goal that 80% of all tax returns be filed electronically by this year (2007).
Taxes and taxation have come a long way since the founding of
our country.
Preparation of income tax returns has changed dramatically in the
past century.
Electronic filing has made preparing and filing taxes easier and more
accurate than ever before.
Do you think Congress will meet this goal? (Answers will vary.)

14. Chief Sources of Revenue
Tariffs had been a chief source of revenue for the early
U.S. government.
In times of war, a tax on income was used to finance the fight.
The first income tax was levied during the Civil War and was used to
pay off the debt incurred during the war.

15. The Sixteenth Amendment
The income tax levied at the time of the Civil War was short-lived. Soon
after, this tax was found to be unconstitutional.
It wasn’t until 1913 that Congress was given the power to tax in the
Sixteenth Amendment.
After Congress was given the power to tax the people, a federal income
tax was put into place.
Funding from this tax has helped reduce our nation’s debt and provide
support for public services to benefit all in our nation.

16. Voluntary Compliance Keep necessary records Report income accurately
Correctly calculate tax liability
File returns
on time
The U.S. tax system today depends on voluntary compliance.
It is the responsibility of taxpayers to keep the necessary records to help
them report their income freely and voluntarily, to correctly calculate their
tax liability, and to file their tax returns on time.
Taxpayers voluntarily follow the steps the tax system lays out.
Failure to do so can result in penalties.

17. Pay-As-You-Go Withholding
Taxes are paid as income is earned
Taxes are withheld based on Form W-4 information
Most taxpayers pay their taxes through a “pay-as-you-go,” or “pay-as-
you-earn” system of withholding.
In the “pay-as-you-go” system, taxes are paid as income is earned or
received during the year.
An employer withholds taxes based on wages paid and the information
provided by the employee on his or her W-4 Form.

18. Form W-2 Shows how much employees earn
Copy must be attached to tax return
Form W-2 shows how much an employee earned in the previous year
and how much money was withheld.
Copies of Form W-2 from employers must be postmarked by
January 31st.
Each taxpayer is required to attach a copy of Form W-2 to his or
her tax return.

19. Financial Record Keeping
It is essential to keep accurate financial records, or records of spending
and income.
Two basic systems of record keeping are on paper and on a computer.
Keep records on a regular basis (daily or weekly).
Keep all paperwork (invoices, bills, receipts).
File paperwork by year and type of income or expense.
Record date of transaction, dollar amount, and description.
Keep business records three years from the date taxes are filed.
Keep records of property for as long as you own the property.

20. Financial Record Keeping
Save:
Paycheck stubs
Bank statements
Completed tax returns and forms
Warranty information
Receipts
Credit card statements
What to Save:
Paycheck stubs, statements of interest or dividends earned, records of
gifts, tips, and bonuses
Copies of completed tax returns along with forms such as your W-4
and W-2
Spending records such as canceled checks, cash register receipts,
credit card statements
Car purchase and lease information
Warranty information, car repair receipts
Medical and education expenses
Rent receipts, home’s title, deed of purchase, mortgage contract, major
home repair and improvement receipts
Receipts from donations or charities

21. Financial Record Keeping
Store items in:
Envelopes or accordion file
Filing cabinets
Computer
Safety deposit boxes
Where to Store
When income is small, an envelope system or accordion file
works well.
Mark envelopes by month, by job, or by expense
Use filing cabinets with files marked by month, by job, or by expense
Store records on the computer
Important documents should be kept in safety deposit boxes or
at the bank.

22. Tax Liability
Tax liability is the total tax bill, or amount of tax that must be paid.
Taxpayers meet (or pay) their federal income tax liability through
withholding, estimated tax payments, and payments made with the tax
forms they file with the government.

23. Three Methods of Tax Return Preparation
Electronically
Tax Preparation Software
Manually
Computers and tax software are used to complete and prepare
tax returns.
Electronic tax preparation helps reduce errors.
Tax returns can be prepared manually on paper forms.

24. Electronic Tax Preparation and Transmission
Electronically preparing and sending (transmitting) tax returns has
many advantages.
Benefits include:
Increased accuracy
Faster refunds
The ability to prepare and file federal and state
returns simultaneously

25. Methods of Electronic Tax Preparation and Transmission
Telefile
Personal Computer
Tax Professional
TeleFile:
The IRS sends a TeleFile tax package to eligible taxpayers.
The tax information is transmitted from a touch-tone telephone.
The TeleFile option is free.
Personal Computer
Taxpayers use a personal computer and software to prepare and
transmit tax returns.
Tax returns are prepared and filed from home, workplaces, libraries,
financial institutions, or retail outlets.
Tax Professionals
Tax Professionals include CPAs, tax attorneys, IRS-enrolled agents,
and tax preparation businesses.
Tax Professionals may prepare as well as transmit tax returns to
the IRS.
Some may charge a fee for the services provided.
VITA (Volunteer Income Tax Assistance) sites also offer
tax assistance

26. Refunds
Money you get back from the government if you OVERPAID in taxes.
We LOVE Refunds!!!!
After an income tax return is prepared, money sometimes is owed to
the taxpayer.
Any money owed to the taxpayer is called a refund.