Tax Law And Accounting

Tax Law and Accounting

The inception of tax law has been revolutionizing revenue production since the congregation of society. As the tax law transitioned from antiquated statutes to modern statutes, the underlying objectives began to expand as well. Tax law originally configured for the sole purpose of revenue gain implemented non-revenue objectives in an effort to address issues related to such areas as the economy, society, and politics, to name a few. In addition, such mandates were made applicable to individuals, as well as corporations. As a result, differences between Generally Accepted Accounting Principles (GAAP) mandated by the Financial Accounting Standards Board (FASB), and the guidelines required in adherence to tax accounting required adjustment for compliance.

Sources of Modern Income Tax Statutes

Modern income tax statutes resulted from the early efforts of the United States government to help pay for the American Civil War by the imposition of the first personal income tax. The attempt was imposed on August 5, 1861 under the Revenue Act of 1861, which taxed 3 percent of all incomes over $800. However, such taxation was rescinded in 1872. Several other attempts at income taxation followed; although the United States Supreme Court made an 1895 ruling with regard to Pollock versus Farmers' Loan and Trust Company, which held that taxes placed on capital gains, dividends, interest, and rents must be apportioned as direct taxes on property. The effect of such apportionment resulted in the prohibition of federal tax on property income received (Income Tax in the United States, 2006).

Political difficulties pertaining to the taxation of individual wages without taxation from property income caused the imposition of federal tax to be viewed as impractical until the 1913 ratification of the Sixteenth Amendment proposed by Congress. Simply stated, the amendment was not an expansion of the government's existing taxing authority, but rather the removal of any apportionment of income tax requirement (Income Tax in the United States, 2006).

The modern interpretation of the Sixteenth Amendment defined income as relating to the imposition of income tax by Congress as:

gains, profits, and income derived from salaries, wages, or compensation for personal service ... of whatever kind and in whatever form paid, or from professions, vocations, trades, business, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever (Income Tax in the United States, 2006).

The inception of what is termed as "modern" tax statutes refers to those tax statutes passed after the ratification of the aforementioned Sixteenth Amendment in 1913.

Differences between Modern and Antiquated Tax Statutes

Modern and antiquated tax statutes vary significantly. The primary differences are a reflection of the time in which such statutes were developed. As indicated previously, antiquated tax statutes were primarily focused on the generation of revenue necessary to pay for the expenses resulting from acts of war and included broad exemptions and low rates that were modest in reach. When the war ended, no such financing needs were necessary and the income tax was repealed. On the other hand, modern tax statutes include developments made to respond to such factors as economic, social, equity, and political considerations, as well as the influence of the Internal Revenue Service (IRS) and the courts. Of particular significance is the implementation of the Current Tax Payment Act passed by Congress. This act was the first pay-as-you-go tax system and requires employers to withhold a specified portion of an employee's wages for taxes. In addition, individuals with income from sources other than wages are required to make quarterly payments to the IRS for taxes estimated as due for the year. Another considerable difference is realized in the complexity of the Federal income tax laws as a result of the frequent changes made. No doubt, modern income statutes require more research in an effort to comply with such complexities (Hoffman, Smith, and Willis, 2005).

Objectives of Modern Income Tax Statutes

Although the primary objective of the first individual income tax of the United States, which dates back to the Civil War, was that of raising revenue, the modern income tax statutes also include the achievement of non-revenue generating objectives. The Federal tax law has developed the following response to such non-revenue generating objectives:

* Economic considerations. The emphasis here is on tax provisions that help regulate the economy and encourage certain activities and types of businesses.

* Social considerations. Some tax provisions are designed to encourage (or discourage) certain socially desirable (or undesirable) practices.

* Equity considerations. Of principal concern in this area are tax provisions that alleviate the effect of multiple taxation, recognize the wherewithal to pay concept, mitigate the effect of the annual accounting period concept, and recognize the eroding effect of inflation.

* Political considerations. Of significance in this regard are tax provisions that represent special interest legislation, reflect political expediency, and exhibit the effect of state and local law.

* Influence of the IRS. Many tax provisions are intended to aid the IRS in the collection of revenue and the administration of the tax law.

* Influence of the courts. Court decisions have established a body of judicial concepts relating to tax law and have, on occasion, led Congress to enact statutory provisions to either clarify or negate their effect.

(Hoffman, et al., 2005)

Specific examples of such tax provisions include the assistance to regulate the economy and the encouragement of socially desirable practices. The regulation of the economy is exemplified by bonus depreciation as a means of making investments in acquired depreciable property more appealing for business use. In addition, the allowance of contributions as a deduction to charitable organizations encourages taxpayers to participate in such transactions. Both the investment and contribution applications signify non-revenue raising objectives of the current tax system (University of Phoenix, 2006).

Critique of Statutes

Modern