1. Chapter © 2010 South-Western, Cengage Learning Federal Income Tax 7.1 7.1Our Tax System 7.2 7.2Filing Tax Returns 7

2. © 2010 South-Western, Cengage Learning SLIDE 2 Chapter 7 Lesson 7.1 Our Tax System GOALS Explain the purpose of taxes and describe the different types of taxes. Describe the U.S. tax system and explain how it works.

3. © 2010 South-Western, Cengage Learning SLIDE 3 Chapter 7 Purpose of Taxes In a free enterprise system such as ours, the government collects money from citizens and businesses in the form of taxes. These incoming funds to the government are called revenue. The government spends the revenues received according to priorities set by Congress.

4. © 2010 South-Western, Cengage Learning SLIDE 4 Chapter 7 Types of Taxes Progressive taxes Regressive taxes Proportional taxes

5. © 2010 South-Western, Cengage Learning SLIDE 5 Chapter 7 Progressive Taxes Progressive taxes take a larger share of income as the amount of income grows. Federal income taxes are progressive.

6. © 2010 South-Western, Cengage Learning SLIDE 6 Chapter 7 Regressive Taxes Regressive taxes take a smaller share of income as the amount of income grows. Sales taxes are regressive.

7. © 2010 South-Western, Cengage Learning SLIDE 7 Chapter 7 Proportional Taxes Proportional taxes, or flat taxes, are taxes for which the rate stays the same, regardless of income. Property taxes are proportional.

8. © 2010 South-Western, Cengage Learning Components of the Tax System The IRS Internal Revenue Service is an agency of the Department of the Treasury. The main functions of the IRS are to collect income taxes and to enforce the tax laws. SLIDE 8 Chapter 7

9. © 2010 South-Western, Cengage Learning Components of the Tax System The power to tax The power to levy taxes rests with Congress. Proposals to increase or decrease taxes may come from the President, the Department of the Treasury, or a member of Congress. The House Ways and Means Committee studies the proposals and makes recommendations to the full House. Revenue bills must pass both the House and Senate and then be signed by the President before they become law. SLIDE 9 Chapter 7

10. © 2010 South-Western, Cengage Learning Components of the Tax System Paying your fair share Tax rates apply to income ranges, or tax brackets. Our income tax system is based on voluntary compliance, which means that all citizens are expected to prepare and file tax returns of their own accord without force. SLIDE 10 Chapter 7

11. © 2010 South-Western, Cengage Learning Components of the Tax System Failure to pay taxes Failure to do so can result in a penalty: interest charges on the taxes owed plus a possible fine. Willful failure to pay taxes is called tax evasion, which is a serious crime punishable by a fine, imprisonment, or both. SLIDE 11 Chapter 7 (continued)

12. © 2010 South-Western, Cengage Learning An IRS Audit Every year, the IRS calls millions of taxpayers for an audit, which is an examination of their tax returns. SLIDE 12 Chapter 7

13. © 2010 South-Western, Cengage Learning An IRS Audit Types of audits Office audit – the taxpayer sits down with the auditor to answer questions and produce records. Correspondence audit – the IRS sends a letter, asking the taxpayer to respond to specific questions or produce evidence of deductions or other entries on the tax return. Field audit – is similar to an office audit, except that an IRS agent or local representative visits the taxpayer’s home or business to examine records or assets, verify information, and ask specific questions. SLIDE 13 Chapter 7

14. © 2010 South-Western, Cengage Learning FICA stands for the Federal Insurance Contributions Act. The FICA tax consists of both Social Security and Medicare taxes. Employees — the Social Security tax rate is 6.2 percent on income under $113,700 through the end of 2013. The Medicare tax rate is 1.45 percent of all income; Employers — the Social Security tax rate is 6.2 percent. The Medicate tax rate is 1.45 percent; and Self-employed —the Social Security tax rate is 12.4 percent on income under $113,700 through the end of 2013. The Medicare tax rate is 2.9 percent.