Frequently Asked Questions about Taxation

Q: What is taxation?

A: A tax is a compulsory payment by an individual or business entity to a governmental body. In practice, there may be little practical difference between a tax and a fee or charge. The legal distinctions, however, are important. One reason for this is that many states’ constitutions and/or statutes restrict the ability of local governments to raise taxes.

Q: What is the Alternative Minimum Tax?

A: Congress created the alternative minimum tax (AMT) to prevent wealthy taxpayers from paying little or no tax due to various deductions, exemptions and other preferences in the tax code. The AMT requires people to recalculate their taxes using income that would otherwise be exempt from regular taxation.

Q: Why has the number of people affected by AMT increased?

A: The main reason the number of people affected by the alternative minimum tax has increased is that, unlike the regular income tax, exemptions in the AMT are not adjusted for inflation. Another factor is that tax credits, particularly the child credit, have caused many middle class taxpayers to have the amount they would owe under the regular tax system to be lower than the AMT.

Q: Can a taxpayer get a refund for an overpayment of taxes?

A: If a taxpayer overpays, he or she can recover that overpayment through administrative proceedings with the Internal Revenue Service (IRS) or litigation in court. A taxpayer must file a claim for a refund with the IRS Commissioner before suing for the refund in court.

Q: What is pass-through taxation?

A: This type of taxation allows gains, losses, deductions and credits from certain forms of businesses to be reported on the individual tax returns of the owners or other members, rather than on a separate form for the business. This may prevent double taxation, so that the same income is not subject to a corporate tax when the business entity earns it and again to a personal income tax when it is paid to owner through a salary or dividends.

Q: What is the Streamlined Sales and Use Tax Agreement?

A: The Streamlined Sales and Use Tax Agreement (SSUTA) is an agreement among states intended to simplify tax rates and make collection easier by encouraging businesses to voluntarily collect use taxes. Under the SSUTA, businesses may register to collect sales and use tax on sales into member states. In return for registration, these businesses receive the benefits of amnesty for uncollected taxes in member states and simplified reporting of state and local sales tax collection, with only one tax return required per state. Registration is permitted even if the business is located in a state that has not adopted the SSUTA.

Q: Are there criminal penalties for violations of the tax laws and regulations?

A: Yes. Agents of the IRS’s Criminal Investigation Division investigate criminal federal income tax cases. There are criminal penalties for tax evasion, willful failure to collect and pay over taxes, failure to file a return, fraud and false statements, aiding and abetting and withholding violations. Penalties range from fines to prison sentences.

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