Tax Law FAQ

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Q: What is the purpose of the tax code?
A: The U.S. tax code, or Internal Revenue Code, is used primarily for providing revenue for the federal government. This actually dates back to 1862, when the first federal statute imposing a federal income tax was adopted by Congress to pay for the Civil War. The tax code is also used for public policy to achieve social, economic, and political goals. For instance, certain tax credits may be given to encourage companies to invest in particular industries in order to provide economic boosts, while mortgage interest has been made deductible for homeowners to encourage people to own rather than rent their homes.

Q: What are the different arenas of taxation among local, state, and federal governments?
A: Local government is primarily financed by property taxes, namely real estate taxes. Other local taxation is in the form of sales taxes and use taxes, and local governments may also collect income tax, gross payroll tax, or a portion of sales taxes that are also collected by the state.

State governments are able to assess taxes on their citizens and activities that occur within the borders of their state, as long as the federal government does not have taxation power or jurisdictional power over that particular arena. For instance, states cannot impose taxes designed to impede interstate commerce or influence international relations.

States may also impose what are called 'sin taxes' on certain products, such as tobacco products, liquor, and gas. The power of the state to tax encompasses the ability to empower entities within the state, such as counties, cities, and school districts to tax their residents. These entities may impose any of the taxes that the state does, within the boundaries established by state law.

State and federal governments both impose income taxes on individuals and businesses. Additionally, the federal government may impose payroll taxes on companies, namely Social Security tax, Medicare tax, and unemployment insurance tax. Other taxes include transfer taxes, such as gift taxes and estate taxes.

Q: How does U.S. tax law apply to international transactions?
A: U.S. tax law will typically only apply to foreign businesses or individuals that conduct business within the U.S. United States businesses and individuals that conduct business outside of the U.S., all of whom are subject to tax in foreign jurisdictions. United States tax laws, foreign tax laws, and international tax treaties may all be applied to determine the overall tax burden associated with international business. For example, a college professor lecturing for a term abroad will still pay U.S. Income tax, even though they are not residing within the U.S. Similarly, legal foreign aliens and U.S. citizens receiving money from overseas must report the income on their U.S. Tax return. There are certain exemptions if critical criteria are met.

Q: What are the consequences of delinquent taxes?
A: The loss of your house and property could happen if your taxes are delinquent for two years, and you cannot get it back after it has been foreclosed. You can also face a year in prison and a fine of $25,000 for each unfiled tax year. Though the prison term doesn't usually happen mostly because they could only fit 1 percent of those who haven't filed in jail the fine is strongly enforced. If you do not file a final return, you could lose your refund. There is usually a time-lag between the time one hasn't filed their taxes and when the IRS contacts them. You could be contacted by phone or through a letter, or you may also be visited in person by an IRS agent.