Federal income tax return
What is a federal income tax return? A federal Income tax return is a statement provided by a tax payer to Internal Revenue Service (IRS), the tax collecting and tax law implementing agency about the details of his tax liability as per rules designed. These details include Gross income, allowable deductions, tax credits and tax due.
The United States Department of Treasury created in 1798 is responsible for issuing notes, bills and treasury bonds. Under this come the Internal Revenue Service, U.S Mint, Bureau of Public dept and Alcohol and Tobacco tax bureau. The IRS is responsible for collecting all individual and corporate taxes. Its collection crossed more than $2 billion during 2001, which was used for varied purposes like war on terrorism, research projects etc... The office of Bureau of Internal revenue was formed in 1877 to collect few types of taxes. The tax rate reached its heights @ 77% in 1918 and came down to 24% in 1929 due to severe depression. Then in 1952, BIR became IRS. By 2003, IRS has about 1, 00,000 employees and a budget of $9.9 billion.
Following are the major operating divisions of IRS:-
1) Wage and Investment division: - which consist of 116 million taxpayers who filed individual and joint tax returns.
2) Small Business and self employment: - consists approximately 45 million small business and self employed tax payers
3) Large and mid sized business: - consist of corporation containing assets of more than $10 million
4) Tax exempt and government entities which came out with employee benefit plans
It also consists of appeal, chief counsel, communication and liaison and criminal investigation division (CI).The IRS mainly consists of Crime Investigation department which catches the tax evaders and helps the federal government in war on drug trafficking, money laundering and so on.
The IRS issues more than 650 forms which helps the taxpayers in calculating and paying their taxes. Each form applies to a different situation. Individuals use form 1040, Corporations 1120 and Partnership firm use 1065, Estates form 706 and Gifts Form 709 and so on.
There are different types of federal tax returns. Some of them are:-
1) Transfer tax Return
2) Statutory (excise) tax Return
3) Employment (Payroll) tax Return
4) Income tax Return:
(A) Form 1040 :- US Individual Income tax return
(B) Form 1040A:- US Individual Income tax return
(C) Form 1040 EZ :- Income tax returns for single and Joint filers with no
dependants
(D) Form 1041: - US income tax return for Estates and Trusts
(E) Form 1065:- US return for Partnership income
(F) Form W2 :- Information return
(G) Form 1040X: - Used to point out errors in previous year returns.
Our point of focus is Federal Income tax return.
Before getting into the details let us first understand as to who can be dismissed as a tax payer?
Now it is like this. If one has not earned any income from any US Source during the previous financial year, then there is no need to file federal tax return but still one has to file Form 8843 which is the Statement for exempt individuals and individuals with medical condition by June 15th . This is done so that the U.S Internal Revenue Service may assign you a non resident status in its records.
And what will happen if one has received compensation through work or fellowship from US source. Then the federal tax return must be filed on or before April 15th. The gross income in calculation of income tax includes almost income earned either thro ethical means or unethical means also. Even sale of illegal drugs is taxable. The IRS has also received returns from criminals since Fifth Amendment. Each individual taxpayer has to file a form 1040 regarding his salary details to the Internal Revenue Service (IRS) by April 15. If April 15th is a Saturday, Sunday or a holiday, then returns are to be paid on the first succeeding day which is not either of these. These tax returns can also be filed with State or local tax collection agency like California Franchise Tax Board. They are generally filed in the forms prescribed by IRS.
Looking into forms 1040EZ, 1040A, 1040 under Filing Requirements, one can find charts of the filing requirements applicable for each year. Form1040EZ is the simplest, then comes 1040A and at last 1040 which applies to all individual tax payers who do not fall under the category of 1040 EZ or 1040A. Following are the three separate charts
Chart A: - For most people.
Chart B: - For Children and other dependants.
Chart C: - other situations when one must file.
Now let us look at the various types of Income tax returns.
1040:-
Form 1040 contains two full pages. Details regarding taxpayer, his/her dependants, income and adjustment to income have to be furnished in the first page. Then allowable deductions and credits, estimated tax which is payable and funds withheld from wages or estimated payment towards tax liability is included in the second page.
This form has 11 attachments (called schedule) which need to be filled by the taxpayer according to his needs.
1040A:-
This is a shorter version of Form 1040. Taxpayers with taxable income below $100,000 use this form. Here standard deductions are used instead of itemizing deductions.
People filing form 1040A can have their income only from (any/all) the following sources:-
(a) Wages, Salaries and tips
(b) Interest and ordinary dividend
(c) Pensions, annuities and IRA?s ( Individual retirement account) <;/P>
(d) Capital gains distributions
(e) Taxable Scholarships and fellowship grants
(f) Unemployment compensation
(g) Taxable social security and railroad retirement benefits<;/P>
(h) Alaska permanent fund dividends
There are also other restrictions.
1040EZ:-
This is the form for Income tax return for Single and Joint filers with no dependants which is simplified, six section federal income tax return issued by United states IRS. Like 1040A, this is also used by taxpayers whose taxable income is below $100,000 and who take standard deduction instead of itemizing deductions.
This form was introduced by IRS in 1982. Title of the form then was ?Income tax return for single filers with no dependants?
1040X:-
This is used to make corrections on Form 1040, 1040A and 1040EZ that had already been filed. So for a tax refund this form must be filed within 2 years after the date the tax was paid or within 3 years after the date the original version was filed, whichever is later. There is certain financial timing type changes which cannot be made only with 1040X but for which form 3115 must also be used which is for Change of accounting method. For example correction of past years business, rental depreciation come under these. Form 3115 contains over 50 types of Specific change types. Noteworthy under this category are Classic book keeping concerns, such as identification of revenue and expenses.
1099:
This form is issued by IRS to prepare and file information return on various types of income other than wages, Salaries and tips (Form W2 is issued for all these). Three copies are made: - One for the payer, one for the payee, third for the IRS.
This form is specifically designed for contractors who work for the company only for a specific assignment. They are not employees of the organization. Since they are not employees, there will be no federal or State income taxes withheld from their payment. This is also reported to IRS so that they are able to track income earned by such contractor. It is the onus of the contractor to calculate his/her own tax and pay them to IRS. Companies have got into such outsourcing as it proves to be cost effective.
Form W2
The Form W2, Wage and tax statement is an information return which is used to report wages paid to employees and taxes withheld from them.
Each employee is entitled to obtain two forms from his employer for his earnings during the entire financial year.
1) Form W 2 which is generally issued in January contains details about the gross earnings in a year and how much was withheld towards federal and state income tax.
2) Form 1042 S- If you are an earning member but still your income does not fall under the taxable category because of tax treaty or if you receive any taxable fellowship, then you will be issued 1042 S.
It is also used to report FICA taxes and Social security administration. Each Employer must submit a form W2 to each of his/her employee to whom wage; salary or any other compensation is paid as a part of employment relationship. This contains reports on income paid during a calendar year to the employee and taxes withheld from the same. This is issued in six copies: - Copy A, Copy B, Copy C, Copy D, Copy 1, Copy2. The employer must send copies B, C, 1, 2 to their employees by January 31st of succeeding year so that they have two and half months time to file their individual return (that is April 15th). Form W2 with FormW3 must be submitted to Social security administration by end of February.
The Penalty Aspect
Now what will happen if federal income taxes are not paid in time? Is there any penalty? Of course yes.
As in any other case, nonpayment of federal taxes or under payment of tax may lead to civil penalties but in certain cases there may be criminal prosecution also.
Some of the Civil penalty?s are:-
• Non payment of tax by due date (including extensions) may
lead to a penalty of 5% of the tax not paid by due date for each month or part
of month that the return is late .This penalty cannot be more than 25%
• A penalty of $100 or 100% of the tax balance (whichever is
less) is levied if filing of returns are delayed by more than 60 days.
• If there is any underpayment of tax in your return due to
fraud, then a penalty of 75% of underpayment will be added to your tax amount.
• Even failure to include your Social security number (SSN)
may attract a penalty of $50.
• There will be a 20% Accuracy-related penalty if
(A) You underpay your tax because of negligence or disregard of rules and regulations
(B) You substantially understate your income tax.
This amount is 20% of your underpayment.
Penalty for frivolous return:-
A penalty of $500 is levied if the return does not include enough information so as to arrive at the correct tax figure or that shows incorrect tax amount because:-
(a) Frivolous position on your part
(b) Intention to delay or interfere with administration of federal income tax laws
This must be paid in full on notice being served by IRS even if one protest against the same. This is in addition to any other penalty provided by law.
But if a person is able to prove his innocence on the fact that non payment of tax was not an intentional act and if he had genuine reasons to substantiate the same, then penalty may not be levied.
Criminal Prosecution:-
You may be subject to criminal prosecution under the following cases:-
• Tax Evasion
• On willful failure to file a return or supply information
or non payment of tax dues.
• On preparing and filing fraudulent return
• Submitting fraud and false statements
Thus we see that Federal income tax rules designed by IRS are quiet Customer friendly but rigid at places where strict vigilance is required.
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