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Introduction

Minimal taxes were required to operate the government during the early days of the United States of America. The first sales tax was imposed to help pay off the expenses incurred as a result of the War of 1812. The first income tax law was enacted by Congress during 1862 to sustain the Civil War. The commissioner of Internal Revenue was established through the Act of 1862 giving the commissioner authorization to “assess, levy, and collect taxes, and the right to enforce the tax laws through seizure of property and income and through prosecution.” (Pearson Education, Inc., Ð'© 2000 -2007)

This income tax was not a permanent tax, being eliminated, revived, and eliminated for a second time in 1895 when the United States Supreme Court ruled that income tax was unconstitutional. Income tax became a permanent obligation in 1913 through the 16th Amendment to the United States Constitution. Amendment 16 resulted in individuals and all forms of business organizations being required to pay taxes on all income. Overtime, numerous modifications provisions have been enacted affecting taxation. The intent of this paper is to describe the sources and the objectives of modern income tax statutes, to compare and contrast between GAAP and tax accounting, also to differentiate between tax avoidance and tax accounting.

Tax Law and Accounting

Sources of Modern Income Tax Statutes

The Legislative Branch, the Executive Branch, and the Judicial Branch all generate sources of tax law. The Internal Revenue Code and the Congressional Committee Reports are the sources of tax law generated through the Legislative Branch. The Legislative Branch operates as the supreme authority “for tax research, planning, and compliance activities.” (Page, et. al., 2008) The Income Tax Regulations, Revenue Rulings, and Revenue Procedures are created through the Executive Branch and the Court Decisions are produced by means of the Judicial Branch. Executive Branch regulations, such as treasury regulations of the tax law and Internal Revenue Service (IRS) Rulings are each interpretations of the law and have less authority than the Legislative regulation. Additionally, the IRS interpretations have less weight than the treasury regulations.

Objectives of Modern Income Tax Statutes

The principal objective of modern income tax statutes is to raise income for government operations. Over the years tax laws have been expanded by the federal government to “accomplish various economic and social policy objectives.” (Page, et. al., 2008) According the text Prentice Hall’s Federal Taxation вЂ" Individuals (Edition 2008), the economic objective is accomplished by using income tax statutes to

пÑ"? Stimulate private industry

пÑ"? Reduce unemployment

пÑ"? Alleviate the effect of inflation on the economy

Articles in tax statutes are adjusted for inflation by using the consumer price index (CPI), exemptions and standard deductions. These adjustments have been established to provide assistance to offset the effects of inflation. Additionally, the federal government also uses income tax statutes to encourage small business, specialized industries, and other activities such as medical or scientific research and experimentation.

The federal government utilizes modern tax law to achieve its’ social objective by encouraging desirable activities such as pension or profit plans to supplement social security and to make charitable contributions and to discourage objectionable actions that opposes the policies of the community. Tax withholding is a procedure that was established as a method to receive tax revenue prior to the taxpayer receiving the monies and to help reduce the amount of revenue defaulted through tax evasion.

Compare and Contrast GAAP and Tax Accounting

Established by the Financial Accounting Standards Board (FASAB), Generally Accepted Accounting Principles (GAAP) is a set of rules, standards, principles, and procedures that are used by organizations to record, compile and report the accounting information for their financial statements. GAAP are required by companies to assist investors with consistency of documentation when analyzing companies financial documents for the purpose of investment opportunities

Tax accounting is a concept of accounting for tax purposes. Tax accounting takes into account when item becomes taxable and depends on what accounting method is applied. “The three primary overall accounting methods are the cash receipts and disbursements method, the accrual method, and the hybrid method.” (Page, et. al., 2008)

Differentiate between Tax avoidance and Tax Evasion

Tax avoidance is a legal exploitation of the tax system and occurs when a taxpayer (business or individual) manipulates the system by finding loopholes in the tax law to legally avoid or reduce the taxes. Off shoring is an example of tax avoidance and happens when a company establishes a business overseas as a tax haven. Other examples include the practice of using tax deductions as a means to decrease the tax payment responsibility.

“Tax avoidance may be considered