It’s Your Financial Life
Date Accessed 2021
You may end up knowing more about taxes than you thought there was to know.
GET SOME EXCISE
Did you ever wonder about the extra taxes you pay when you buy a gallon of gas or an airline ticket, or the ones that get tacked on to your phone bill? The federal government imposes excise taxes on the manufacture, sale, or consumption of specific goods and services produced and used within the country. In addition, state and local governments often add excise taxes of their own.
Instead of being levied as a percentage of the price, as sales taxes are, excise taxes are figured as a perunit cost—such as the federal charge of 18.4 cents on a gallon of gas. The best-known, and oldest, excise taxes increase the prices of tobacco and alcohol, as well as crude oil and fuels.
In fact, high excise taxes, not the wholesale price of gas, help explain why you pay more to fill your fuel tank in some states than you do in others.
As prevalent as excise taxes seem, the revenue they produce amounts to less than 10% of all the tax the federal government collects. Some of the money ends up in special trust funds that are used to improve highways or airports, or to clean up hazardous chemical spills. Part of the excise tax on phone bills is designated to pay for internet access in public schools.
If you receive income that’s reported on a Form 1099—as dividends and interest are, for example—you’ll be asked to provide your Social Security number, also called your Tax Identification Number or TIN, and sign Form W-9 which certifies that you’re not subject to backup withholding. That means you don’t have to have tax withheld on this type of income, but only pay the tax owed when you file your return.
If the IRS hasn’t notified you that you must pay backup withholding, which could happen if they suspect you are underreporting interest or dividend income, you can sign with a clear conscience. If you don’t complete the form, income taxes will be withheld. A 28% withholding rate applies.
TAXPAYER BILL OF RIGHTS
IRS Publication 1, “Your Rights as a Taxpayer,” is sometimes described as a taxpayer’s bill of rights.
Among the things you’re guaranteed are the rights to:
- Know why you’re being asked for information, how it will be used, and what will happen if you don’t provide it
- Produce only the documents the IRS asks for
- Bring someone with you to any meetings with the IRS and record any meetings with an IRS representative
- Interrupt any meeting with the IRS if you need professional advice
- Be represented by someone authorized to practice before the IRS, such as an attorney, certified public accountant, or enrolled agent
- Propose installment payments for taxes that are due
DOING THE WASH
Did you know that federal law requires banks and businesses to report deposits and payments of more than $10,000?
It’s one of the tools the government uses to try to prevent money laundering, or schemes to route illegally acquired cash through legitimate bank accounts and businesses to make the money appear as if it had been earned legitimately.
WHAT’S AN AUDIT?
If the IRS thinks you owe more tax than you paid, the agency schedules an audit, or an examination of your tax return and the records that back up your claims. They’re checking to see if you’ve reported all your income and are entitled to all the adjustments and deductions you’ve claimed.
There are actually several types of audits. A correspondence audit is conducted by mail. You supply copies of the specific records that the IRS requests, and you get a letter reporting the agency’s conclusions— usually with a bill for additional tax.
An office audit takes place in an IRS office. You’re told ahead of time what the questions are and which records to bring with you to review with a tax auditor.
A field audit takes place in your home, your office, or the office of a tax professional who can represent you before the IRS. It’s conducted by a revenue agent, who can examine your entire return and all your supporting documents.
It’s possible you may prevail and owe nothing more. And if you disagree with the IRS finding that additional tax is due, you can appeal. You can even take your case to court if you can’t reach a compromise solution, but it’s a slow and expensive process.
A Value-Added Tax (VAT) is a national sales tax widely used across Europe, as well as in Canada, Mexico, and other countries either to supplement or replace a national income tax. Like other sales taxes, a VAT is a flat tax. But it’s imposed on sales at each stage in the production of something of value, from the sale of raw materials to retail distribution.
For example, when you pay VAT on a new wool jacket, yours is the last in a series of VAT payments that started with the sale of the wool, moved on through the production of the cloth, the manufacture of the jacket, the purchase by the wholesaler, and the order from the retail shop.
Is a VAT possible in the US? One of the factors that works against enacting it is that a national sales tax would probably restrict what states could collect in sales taxes of their own. And sales taxes are a primary source of state revenue.