6 Surprising Facts About The Early Days Of Income Tax

When thinking about the word “taxes,” most taxpayers think about the money being taken out of their paychecks, rather than the early history of American taxation. However, some of the facts in this article from SFGate.com on the early days of the income tax are very interesting, so I though I would share the information with all of my blog readers. Check out a few of the facts below, or head over to SFGate.com for the full list.

Fact One: Taxes Were Simple

The first 1040 form produced by the Bureau of Revenue, as it was called then, totaled only four pages, with three pages to be filled out by the taxpayer, and one page of instructions. The tax system was so simple.

Fact Two: The Tax Base Was Small

The first $3,000 of income for an individual taxpayer, or $4,000 for a married couple was exempt from tax. In 1913, the tax only applied from income between March 1 and the end of the year, so these exemptions were adjusted to $ 2,500 and $3,333 for that year. This meant that most Americans didn't have to pay any tax. If you adjust $3,000 in 1913 for inflation, it is equivalent to $66,000 in today's dollars.

Fact Three: The Tax Rate Was Low

The tax rate for those who had to pay was minuscule - 1% of taxable income, less the exemptions above and the deductions that were allowed at the time. High-income earners paid more, however, as a 1% surcharge was levied on taxable income between $20,000 and $50,000. The surcharge went as high as 6% for taxable income above $500,000. A taxable income of $500,000 in 1913 is equal to approximately $11 million in today's dollars. (For more, see A Concise History Of Changes In U.S. Tax Law.)

Continue reading at SF Gate.com…

US Tax Bite Smaller than Other Nations'

From CSMonitor.com:

As millions of Americans file their tax returns this month, they can find some solace in comparing US tax rates with those in other nations. Or can they?

The United States still has a lower overall tax burden than the typical advanced economy in Europe. But the gap isn't as big as you might think, and it may be poised to shrink as the pace of federal spending ticks upward. Here's a look at how Americans' tax burden ranks against that of citizens of other countries, and why it matters.

How do US tax rates compare with those in other nations?

The average American pays wage-based taxes that are similar to what Britons pay – and not much lower than in France. Japanese citizens enjoy the lowest rates among the Group of Seven large industrial economies, or G-7. This includes national and local income taxes, plus payroll levies such as the employee share of Social Security.

But wage and payroll taxes are just part of the picture. Add in sales taxes, capital gains taxes, property taxes, and corporate taxes, and the US sends 28 cents of every dollar of output to the government. That still matches Japan for the lowest ratio of tax revenue to gross domestic product (GDP) among the G-7 nations. France and Italy score highest.

Understanding The U.S. Tax Withholding System

From the San Francisco Gate:

Income taxes weren't always withheld from people's paychecks. In fact, income tax withholding is a relatively recent development. Before 1943, taxes were only withheld in spurts when the government needed to raise extra revenue. This article will explain how we got the system that takes income taxes out of your paycheck and how that system works.

The Development of the Tax Withholding System

Tax withholding first occurred in 1862 under Abraham Lincoln for the purpose of helping to finance the Civil War. The federal government also implemented a plethora of excise taxes for the same purpose. But in 1872, not only was tax withholding abolished, but the income tax was repealed entirely.

After the ratification of the 16th Amendment in 1913, the income tax became permanent. The amendment was facilitated by the need to pay for World War I, and tax withholding was again implemented. However, withholding laws were repealed in 1917 because of employer complaints. Collecting income taxes from employees imposed a large burden on employers by placing them in the role of tax collector in addition to the role of businessman.

This time, it would be only 18 years before tax withholding resurfaced. After the Social Security Act passed in 1935, Social Security taxes were withheld by employers. This change paved the way for income taxes to be withheld again starting in 1943 with Congress' approval of the Current Tax Payment Act. Once again, war expenses were used as justification for tax withholding. As the early 20th-century writer and intellectual Randolph Bourne once noted, "War is the health of the state." Not only were taxes to be withheld again, but a massive tax hike was enacted. Income tax went from being a tax that was only paid by a few high-earning Americans to one that was paid by both the rich and the common man. The government wasn't sure it could successfully collect the higher taxes from its citizens without withholding at the source.

The 1943 tax withholding system was developed in part by famous economist Milton Friedman, who then worked for the Tax Research Division of the Treasury. Originally a Keynesian economist who supported a large role for government in the economy, he later converted to the classical liberal mode of economic thought that decries government intervention, and he regretted his role in creating the tax withholding system. The system has stuck ever since, and some of today's retirees are the only ones who remember a time before tax withholding.

Cigarette Tax Bump in 15 States Lifts U.S. Fees to $2.35 a Pack

After cigarette taxes went up in 15 states during the year 2009, it brought the national average to an astounding $2.35 a pack. The average state tax assessed on a pack of cigarettes is $1.34, in addition to the $1.01 federal tax that was also increased last year. As this Bloomberg.com article explains, the various increases have resulted in more than $1 billion in new state and federal tax revenue.

Smoking rates in the U.S. fell about 15 percent in the last decade, though declines slowed in the last five years, according to the Atlanta-based CDC. Thomas Frieden, the agency’s director, has warned that decades of smoking reductions may be ending unless taxes increase and more money is spent on education.

“Increasing cigarette excise taxes is one of the most effective tobacco control policies,” the report’s authors wrote. “Additional increases in cigarette excise taxes and dedication of all resulting revenues to tobacco control and prevention programs at levels recommended by CDC could result in further reductions in smoking.”

Each $1-a-pack increase brings in about $9.1 billion in annual tax revenue, according to the report. A dollar increase, over time, also prevents about 1 million smoking-related deaths and stops 2.3 million children from becoming smokers, the CDC said.

Continue reading at Bloomberg.com…

5 Myths About your Taxes

From the Washington Post:

1. The poorest and the richest Americans pay no taxes.

About 45 percent of households will owe no federal income tax in 2010, according to our estimates. Half of them earn too little, while the other half -- mostly middle- and lower-income households -- will take advantage of tax credits such as the earned income credit, the child and child-care credits, the American Opportunity and Lifetime Learning credits, which help pay for college, and the saver's credit, which subsidizes retirement saving.

But even citizens who pay no income tax still pay other kinds of taxes. They pay Social Security and Medicare taxes when they work, sales taxes when they buy things and property taxes on their homes. Drivers pay gasoline taxes, and smokers and drinkers pay excise taxes on tobacco and alcohol. According to our research, more than 75 percent of us will pay at least some form of federal tax in 2010.

Those who pay no federal taxes are mostly the low-income elderly or very poor families with children. Even about half of those with annual incomes under $10,000 pay some federal tax, most often payroll taxes on wages.

And yes, the richest Americans pay taxes, too. Though a tiny minority manage to avoid federal income tax through elaborate tax planning, 99.7 percent of those with annual incomes above $1 million will pay federal taxes this year, surrendering 27 percent of their earnings to the government. The average American taxpayer pays 18 percent.

2. Americans are overtaxed.

In 2007, federal, state and local taxes claimed about $3.8 trillion, or 27 percent of U.S. gross domestic product. That's nearly $13,000 for every American. Two-thirds of tax revenues went to the federal government.

Continue reading at WashingtonPost.com…

Threats Against IRS Employees on the Rise

From the Wall Street Journal:

The federal agency charged with ensuring the safety of IRS employees said it has seen an increase within the past several years in threats against agency personnel.

In the past four years, there appears to have been a "steady, upward trend" in the number of threats against IRS employees, said an official with the Treasury Department's Inspector General for Tax Administration. That assessment, offered in response to an inquiry from Dow Jones Newswires, is based on preliminary data, the official cautioned.

On Thursday, 53-year old Andrew Joseph Stack crashed his private plane into an Austin, Texas, office building that housed IRS workers, killing himself and one IRS employee and injuring 13 others.

Following the attack, Inspector General J. Russell George said his agency will consider whether changes to security policies are necessary to improve safety.

"There's no question that in the wake of this tragedy, we will be directing attention to that very issue," Mr. George said in an interview. "There are limitations, however, on what you can anticipate about what a disturbed, troubled person can do."

10 Secrets the IRS Does Not Want You to Know

Dealing with IRS collection agents can be a scary thing, however as this blog entry from my law firm’s website points out, there are dozens of secrets about the tax debt collection process that the IRS does not want taxpayers to know. After defending Americans against the IRS for nearly twenty years, my staff and I are familiar with all of the IRS’ secrets and collection tactics. I have included a few of the items on the top 10 list below, but you can check out the full text at the Roni Deutch Tax Relief Blog.

1. Automatic Extensions

Although we all rush to get our tax returns filed before the April 15th filing deadline ever year, the IRS actually provides you with an easy way to get an extra six months to file your return. By requesting an automatic extension using IRS Form 4868, you can get a few extra months to file your return. In many cases, it is often better to request an extension then to file a flawed return that will result in an audit or back tax liability.

In addition, filing for an extension alone carries no penalty with it. Rather, it is the failure to pay on time that will result in interest and penalties. An automatic extension does not extend the deadline to pay taxes to the IRS. Therefore, if you anticipate having an outstanding tax liability, you will still need to pay the IRS by April 15th to avoid penalties and interest. On the other hand, if you are expecting a refund, then you need not worry about being penalized for requesting an extension.

2. The IRS Wants To Settle Quickly

It may not seem like it when you are dealing with them, but the IRS actually wants to settle your delinquent account as quickly as possible because pursuing collections against you can be expensive. In some cases, the IRS can even be convinced to settle your account for less than what you owe. However, you will need to convince the IRS that because of your financial circumstances it is better for them to accept your offer to pay a reduced amount.

3. The IRS Does Not Want to Seize Your Assets

One common misconception is that the IRS prefers to seize your personal property and liquidate it to satisfy your tax debt. However, the process of identifying, locating, seizing, and selling your assets is a very difficult and labor-intensive process for the IRS. As such, the IRS would much rather settle with you then go down this path. Additionally, issuing a wage garnishment or bank levy is much easier and cheaper for the IRS to obtain. If you ignore your tax debts, then the IRS will likely try to use a wage garnishment or bank levy to try to collect from you as opposed to seizing your assets.

UBS Tax Case Could Backfire On U.S.

Some experts feel the high profile case of the US vs. UBS could hurt its global economic standing, backfiring their original plan. Check out the following article from Reuters.com discussing the issue.

U.S. banks and the U.S. economy could suffer as a result of the high-profile tax evasion case pitting the Internal Revenue Service against UBS AG, supporters of the Swiss bank said in a federal court filing in Miami.

In a joint filing on Friday, five business and banking groups urged Federal District Court Judge Alan Gold to reject IRS demands that UBS (UBSN.VX) (UBS.N) reveal the names of 52,000 Americans suspected of using the bank to hide nearly $15 billion in assets and evade U.S. taxes.

Echoing a similar filing last month by the Swiss government, the petitioners said any exchange of confidential banking information should be handled through existing legal treaties rather than the courts.

The petitioners were led by the Swiss Bankers Association and Economiesuisse -- an umbrella group representing powerful Swiss industry, trade and economic associations.

They also argued that the IRS was seeking to embark on a "fishing expedition" and had no international legal standing to use a tool known as a John Doe summons to investigate suspected tax fraud by individuals whose identities and possible legal transgressions were unknown.

The IRS action violates both Swiss sovereignty and the framework of international law, the court filing says.

"Disregarding established treaty protocols and imposing conflicting obligations upon multinational enterprises, as the IRS urges, also would encourage courts in other jurisdictions to ignore established treaty protocol in taking similar measures against U.S. banks, enforcing subpoenas and similar broad-based information demands served on their overseas offices," it warned.

"Such a result not only would erode the primacy of U.S. law and treaty protocol, but could encourage non-resident aliens and foreign entities to withdraw significant deposits from U.S. based institutions to the detriment of the U.S. economy," it added.

"Further, imposing obligations on foreign businesses to violate their home country laws would discourage such businesses from entering the U.S. market."

The court filing offered no estimate of what it said could be "significant capital outflows" from U.S. financial centers, as one unintended consequence of the crackdown on UBS.

US, Switzerland To Begin Tax Treaty Negotiations

From The Associated Press:

The Treasury Department this month will begin revising a tax treaty with Switzerland, which has pledged to increase transparency and help crack down on tax evaders with money in Swiss banks.

The Swiss government opened the door for the talks last month after agreeing to cooperate with international tax investigations of wealthy foreigners accused of hiding billions of dollars in banks there. The move broke with a long-standing tradition of strict Swiss protections for individuals who use its banking system.

"We welcome moves by Switzerland to implement international standards by agreeing to revise the U.S.-Switzerland tax treaty," Treasury Secretary Timothy Geithner said Monday. "I look forward to swift conclusion of an agreement ... and I will continue to demand transparency from countries on behalf of American taxpayers."

The Treasury Department said negotiations between the two nations will begin April 28 in Berne, Switzerland.

The talks come as the Obama administration wants Swiss bank UBS AG to turn over information on thousands of U.S. customers who concealed their accounts from the government in violation of tax laws. UBS has formally accepted responsibility for helping Americans hide assets and agreed to pay $780 million in fines and restitution.

U.S. authorities in January charged Raoul Weil — a senior executive with UBS — with conspiring to hide $20 billion in assets from the IRS using secret overseas accounts. And a former UBS banker, Bradley Birkenfeld, pleaded guilty last year to fraud conspiracy charges in Fort Lauderdale, Fla. He has been cooperating extensively with U.S. investigators and has not yet been sentenced.

Swiss banks hold an estimated $2 trillion of foreign money, and financial services account for about 12 percent of the nation's economy. According to the Boston Consulting Group, those holdings amount to one-fourth of the world's foreign-owned assets.

The recent policy shift by the Swiss government allows it to demand bank account holders' identities in cases of suspected wrongdoing and share that information with foreign authorities.

World leaders meeting in London last week pledged to crack down on tax haven countries by imposing sanctions on the worst offenders, such as withholding financing from the International Monetary Fund or World Bank.

U.S. Tax Case Against UBS Grows Wider; Talks to Settle

From The Wall Street Journal:

UBS AG is under legal pressure as U.S. prosecutors expand their investigation into whether the Swiss bank helped tens of thousands of Americans avoid paying taxes, said several people involved in the case.

U.S. tax investigators believe the number of American clients that UBS helped to avoid taxes could be much higher than the previously disclosed estimate of about 17,000, these people said. The people said investigators are also looking into whether other parts of the bank besides the wealth-management unit were involved in helping clients avoid U.S. taxes.

The bank is in a round of talks with the Justice Department to avert a possible felony indictment by admitting to criminal conduct and paying a penalty in the range of $1.2 billion, these people said.

UBS has publicly denied any wrongdoing, and a bank spokesman said the bank "does not comment on...speculative matters." A Justice Department representative also declined to comment.

New UBS Chairman Peter Kurer has indicated that striking a deal with U.S. prosecutors is a top priority. In a Jan. 15 presentation for investors, he said goals for 2009 include a "DOJ settlement" and a "recovery of UBS's reputation."

UBS became the focus of U.S. criminal and civil probes into alleged offshore tax evasion in 2007, when a former UBS executive told U.S. officials that the bank allegedly began telling American customers in 2002 that it wasn't required to disclose their identities to the Internal Revenue Service.

Prosecutors in Florida have indicted one former high-level UBS executive on charges of helping Americans evade taxes and have detained a second executive as a material witness; Bradley Birkenfeld, the former UBS executive who tipped off U.S. officials, has pleaded guilty to the same charge and is helping the IRS and the Justice Department.

In the civil case, the Justice Department and the Internal Revenue Service are discussing whether to ask a federal judge for a new order to force the bank to turn over the names of its American account holders, people involved in the case said.

The IRS obtained a broad civil summons from the U.S. District Court for the Southern District of Florida in July 2008 to request UBS hand over the names of all of its American clients, but the bank has yet to do so. An IRS spokeswoman declined comment. The bank had no comment.

The Case for Overhauling a U.S. Tax System

Sam Dealey of USNews.com recently authored an opinion piece on the need to overhaul the United States tax code. Below is a snippet from the article but you can read the full text here.

"The monopoly on good ideas does not belong to a single party," President-elect Obama reportedly told congressional leaders Monday during a private meeting about an economic stimulus package. "If it's a good idea, we will consider it."

When it comes to taxpayer money—raising, spending, and occasionally deigning to return it—neither party in Congress has demonstrated particularly good ideas lately. The majority of lawmakers seem to believe that stimulating the economy means expanding recurring welfare programs, plowing money into pet projects of only limited or short-term use, and bestowing inadequate, selective tax cuts.

But if Obama is looking for ideas, he might consult with Nina Olson, the national taxpayer advocate at the IRS. In her annual report to Congress, released yesterday, Olson makes a persuasive case for overhauling the U.S. tax system.

"The largest source of compliance burdens for taxpayers, and the IRS, is the overwhelming complexity of the tax code," Olson writes. "The only meaningful way to reduce these burdens is to simplify the tax code enormously."

It's common sense and worth a read, but a few figures stand out:

• Americans spend 7.6 billion hours annually trying to figure out their federal taxes. Working eight-hour days, five days a week, 50 weeks a year, that's the equivalent of 3.8 million full-time workers.
• At the average hourly wage of $27.54, that tax-preparation time amounts to $193 billion, or 14 percent of aggregate income tax receipts.
• A staggering 60 percent of individual taxpayers are so bewildered by the tax code that they hire outside preparers. An additional 22 percent buy computer software.

Americans Failing Taxes 101

From CNN.com:

Americans may like to talk about taxes but according to an annual survey by The Tax Institute at H&R Block (NYSE: HRB), most can't answer even the most basic tax questions correctly.

"Given the current economic climate -- and the need for taxpayers to claim every tax credit and deduction they're due -- the survey results are alarming," said Amy McAnarney, executive director of The Tax Institute at H&R Block. "The bottom line: Americans are failing Taxes 101."

The Tax Institute survey assessed the knowledge and opinions of a nationally representative sample of more than 1,000 U.S. adults, and found the majority doesn't know a credit from a deduction and, even more surprising, they aren't completely sure how much they even pay in taxes.

"Americans will spend more this year on taxes than food, housing and clothing combined," said McAnarney. "While they may clip coupons or negotiate their mortgage, most don't pay attention to their largest bill -- their taxes. This could be especially troublesome for people who prepare their taxes themselves or don't check their tax professional's credentials."