The Birth & Growth of the Income Tax in the United States

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Income Tax

Most people are oblivious of the fact that the United States has not always consistently imposed an income tax. Most people assume that the Internal Revenue Service has existed in its current form forever. Though it is false, this assumption is not without reason: national governments have a well-earned reputation of being tax hungry entities. In reality, however, the U.S. has only consistently collected a tax on income since the passing of the sixteenth amendment in 1913. But though the U.S. has only regularly collected an income tax since after the sixteenth amendment, this does not mean that the U.S. government never collected such a tax earlier.

After the eruption of the Civil War, President Lincoln and the Congress passed the Revenue Act of 1861, and this act allowed the government to impose a tax on income to fund the war effort for the Union. The Revenue Act gave birth to a federal office in charge of collecting the tax, and this office was the embryonic form of the IRS.

The Revenue Act of 1861 grew out of necessity. The Union army needed additional funds in its struggle against the Confederacy. The 1861 act first put forth a rate of 3 percent on income above $800. This rate was subsequently discarded when the Revenue Act of 1862 was passed. The act of 1862 imposed a rate of 3 percent on income between $600 and $10,000, and 5 percent on income over $10,000. These rates were also later discarded and in 1864 a new act (the Revenue Act of 1864) imposed rates of 5 percent on income between $600 and $5,000, 7.5 percent on income between $5,000 and $10,000 and 10 percent on income above $10,000. These multiple acts provided the Union with a large source of its revenue: approximately 21 percent of Union funds were raised from income taxes.

Though it was only intended as a temporary measure during wartime, the income tax lingered for a bit after the Union declared victory. The various public projects associated with the Reconstruction era required funding, and so an income tax was collected until roughly 1872. But even though the tax expired around this time, a precedent was established, and in 1894 a peacetime income tax was included as a provision of the so-called Wilson-Gorman Tariff Act. The Wilson-Gorman act reduced the tariff rates set by a previous act, and proposed a 2 percent tax on income above $4,000 in order to cover the deficit. The income tax provision of the Wilson-Gorman measure was ruled unconstitutional by the Supreme Court in its opinion of Pollock v. Farmers’ Loan & Trust Co. in 1895, but the income tax eventually made its return with the sixteenth amendment.

To this day, opponents of the income tax continue to make arguments against its constitutionality, but none of these arguments have passed legal scrutiny. No matter what your position on the income tax, it is important to remember that even if this tax disappeared tomorrow we can be certain another one would take its place in double quick time.

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What are the Penalties for Filing a Late Tax Return?

Having to file a tax return late is always a tough situation. The extra fees can be steep and the longer you wait the more in danger you are of being subject to the failure-to-pay penalty. However, if you find yourself in this position it’s important to know what the penalties are so you plan for them in advance.TaxReturnScrabble

The Failure-to-File Penalty

The failure-to-file penalty applies to you if you did not file your tax return by the filing deadline. This penalty is typically more than the penalty which follows from failing to pay your taxes, and for this reason it can turn into an extremely troublesome experience.

Size of the Penalty

Filing your taxes late normally subjects you to a fee of 5 percent of any money owed for each month that you did not file. It begins to accrue in value on the first day that you missed the filing date. The penalty can reach up to a maximum of 25% of the taxes you owe in failing to file.

Late Payment Penalty

This penalty only applies if you failed to pay any taxes owed by the tax deadline, regardless of whether or not you filed on time. This payment penalty is worth 0.5% of any taxes owed for every month that you do not pay. While it’s not as steep as the failure-to-file penalty, and is often waived if both penalties apply for each month you owe, it is still an important thing to be aware of.

To avoid these penalties, you should always file and pay your taxes on time. Don’t wait!

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You Missed the Tax Deadline?Now What?

Deadlines and dates get away from people all the time. In our fast-paced, hectic society, missing a deadline on occasion is practically inevitable. The good news is that if you have missed your tax deadline, there are remedies available which are not detrimental to your financial stability. The few tips below will help you understand what to do if you did miss the deadline.TaxClock

Use IRS Free File

If you have earned $62,000 or less for the 2015 tax year, you can use IRS Free File. There are forms available right on the IRS website that can be filled out online. You can also file for an extension, even though you are late, giving you until October 17, 2016 to file. Filing through Free File is one of the most secure online options and is a faster delivery option to the IRS.

Accept the Penalty for Filing Late

Even if you miss the tax filing deadline by one single day, you will have penalties and fees for being late. You just have to accept it and be prepared to pay it, because, forgetting or not being prepared comes with consequences. Figure out what your penalties may be and put funds aside or send them in as a partial payment.

Final Word

Filing late really is not that big of a deal. Yes, it comes with penalties, but they are not as stiff as you might expect. It is best to work with the IRS and make a payment plan so that you can pay what is owed, if that is the case. Also, accept the reduced refund minus late payment fees/penalties.

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How to Avoid a Tax Audit

The tax audit is the biggest fear of every taxpayer in these United States. However, the good news is the IRS audits less than 1% of tax returns every year. In 2015, the number fell to the lowest in a decade. Nevertheless, the possibility is still there. We are going to show you how you can go about avoiding a tax audit.TaxDictionaryDefinition

Don’t Make Mistakes

A surefire way of receiving a visit from the IRS is to make mistakes on the amount you have deducted, reported, and claimed. Most of the time, this is a matter of human error. However, the IRS doesn’t know this and they have to assume the worst.

Double-check your return and make sure you can account for absolutely everything with paper evidence.

Claiming Big and Contributing Big

The very wealthy and the very poor are most at risk of receiving audits. This is because low-income families have access to big tax breaks and the wealthy are more likely to donate or hide their money to get out of paying tax.

These brackets are fertile grounds for fraud, so be extra careful if you are claiming a wide range of tax credits.


The IRS has repeatedly said that filing returns electronically reduces the risk of errors. Since they believe this, it translates to a lower chance of receiving an audit. E filing will dramatically decrease the audit risk simply because it is much harder to let genuine mistakes slip by when filing in this way.

As always, speak to a tax expert to ensure you are filing correctly.

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IRS Audits Lower than Ever

The figures don’t lie. The number of IRS audits has fallen below 1% once again. This marks the lowest number since 2005, and it’s a cause for relief for those in all tax brackets. We’re going to take a closer look at what this means for you.ScrabbleIRS

Why Did it Happen?

The main reason why audits fell to their lowest level in a decade is because of the cuts made to the IRS. They have a smaller workforce; therefore, they are less able to audit people.

Nevertheless, don’t assume that this gives you the chance to defraud the Federal government of a few dollars here and there. Audits haven’t simply decreased in number. They have become more targeted. They have become more inflexible, and the costs of doing something wrong are huge.

Targeting the Wealthy

One big change is the targeting of the wealthy. The IRS has been criticized by both President Barack Obama and the public for unnecessarily concentrating their efforts on the American middle classes. It meant their returns were low and the wealthy were frequently able to pay less tax.

Obama has demanded a change in the way the IRS operates, and this includes targeting the wealthy.

What Does it Mean for You?

You would be wrong for believing the average American taxpayer no longer has to worry about the potential for an IRS audit. This is not the case. The IRS still audits those from all sections of society.

Continue to be vigilant and continue to be accurate when it comes to your taxes. The IRS won’t hesitate to audit you!

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The IRS More Frequently Targets “Cash Only” Small Businesses

Many small businesses refuse to take cards because of the fees which come with them. When cards are accepted the fees generally come out of overall profits. The answer to this dilemma is cash, but the IRS does not like cash because it’s hard to track and it can easily lead to fraud. Many small companies have been audited because of their cash only policy.CashOnly

Targeted by Auditing

Let’s get one thing straight, small businesses with “cash only” policies aren’t being shutdown unless they’re actively trying to avoid paying taxes. Nevertheless, the IRS is singling them out for auditing to ensure they are doing things by the book.

The fraud risk is so high that the IRS has no choice but to target these businesses. The crackdown has happened due to a growing reputation that the IRS will let businesses operating under these policies slide.

What Can You Do?

Businesses that only accept cash should have robust accounting procedures so that in the event of an IRS audit you can prove that you haven’t broken any rules.

Unfortunately, repeatedly businesses find themselves in court because they can’t prove where the money has come from and they’ve paid the right amount to the IRS. This results in their business being forced to close.


While there is a renewed crackdown on businesses with these policies in place, it’s no reason to panic. Review your accounting records and double-check what you report to the tax authorities this coming year. Do everything by the book and you have nothing to fear.

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8 Silly Ways the Government Wastes the Money You Pay in Taxes

The Federal government regularly wastes your money on various causes. In an annual tradition, we get to find out the details behind the government’s wasteful spending habits. Here are the latest silly ways the government has spent your tax dollars.CoinsMoney

$35,000 on Solar Panels

The Agriculture Department spent $35,000 on solar panels for a brewery in North Michigan, where they don’t get much sun anyway.

$2.7 million on Weight Loss

The National Institutes of Health spent $2.7 million on a weight loss program for truckers.

$40 million Tax Credit for a Luxury Hotel

The IRS gave this tax credit to Donald Trump, who wanted to make a luxury hotel out of the Old Post Office in Washington.

$545,000 on Testifying

The State Department spent this money on a training course to show senior officials how to properly testify before congress.

$683,000 on Hamlet

The National Endowment for the Arts gave theatre companies in Virginia this money to perform adaptations of Hamlet, without any dialogue.

$50,000 for Casinos

The National Science Foundation also awarded a $50,000 grant to create a random number generator for casinos.

$65,000 on Bugs

The National Park Service spent this money to see what happened to bugs when they switched off the lights in parks.

$43 million on a Gas Station

The Pentagon spent this money on a gas station in Afghanistan in a project that should have cost $500,000.

The terrifying part about all these silly ways the government has wasted money is that we elected these officials.

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How Tax Rates & Brackets Will Change in 2016

It is essential that you know how the tax system is going to change ahead of time. This will help you plan so you can pay as little as possible. 2016 will see a number of alterations to the tax system, and we are going to look at some of the more important alterations below.TaxRatesCharters2016


Single people can now earn $9,275 before they have to leave that precious 10% income bracket. Remember, this only applies to taxable income.


Couples can earn up to $18,550 in taxable income before they have to pay above 10% of their income. This also applies to surviving spouses. It does not apply to couples who decide to file individually, however.

Deductions and Exemptions

In 2016, the standard deduction for heads of household will rise to $9,300 from $9,250. The other standard deduction amounts for other taxpayer categories will remain unchanged.

Personal exemptions go up to $4,050 in 2016, which is an increase from $4,000 in 2015. The Alternative Minimum Tax exemption goes up to $53,900 for singles and $83,800 for married couples who decide to file jointly.

Other Major Changes

The other major changes are as follows:

  • Maximum Earned Income Credit is $6,269, up from $6,242.
  • The monthly limit for transportation benefits has stuck at $130. For qualified parking, the amount has gone up to $255, which is an increase from $250.
  • Foreign earned income exclusion is $101,300, which is an increase from $100,800.

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Things You Should Know About Federal Tax Liens

A tax lien is something that the IRS files against you in order to lay claim to your personal property. You will have a tax lien filed against you when you don’t pay your taxes. Dealing with a tax lien can be quite exhausting and you need to make sure you avoid it.Lien

If you are in this position, however, here are several things you need to know about such liens.

The Process

First, you have to be assessed for tax before a lien can be issued against you. The IRS has ten years to collect unpaid taxes, so liens can only be issued during this period. After this, the outstanding tax expires.


If you don’t pay your taxes, the IRS will send a letter every 30 days. This is a Notice and Demand for Payment. If you still don’t pay, the Final Intent to Levy notice will arrive at your registered address. This is your final warning and you have 30 days to pay either the taxes or appeal for another assessment.

The government files a lien in court nine months after your tax has been assessed. A lien is a public document and tells creditors that the government has stepped in against you.

After a Lien is Activated…

Once a lien has been activated, the Federal authorities can begin reclaiming the unpaid tax in a number of ways. For a start, this can happen through physical taking of property, such as your car and house. Most of the time, it happens through garnishing your wages and actively taking the money from your bank account.

Final Word

A tax lien is a serious situation in which to find oneself. If this happens, the best course of action is to work with the IRS and come to a settlement as soon as you possibly can.

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How the IRS Tackles Fraud

With every working citizen of the United States having to file taxes, the number of tax returns is in the hundreds of millions. With a system so large, it may seem easy to get lost in the crowd. This is what many who cut corners on taxes tend to believe. The IRS has a number of safe guards in place to stop tax schemes. Here are some ways that the IRS deals with fraud. TaxFraudPic

Enlisting the Help of Tax Preparation Firms

One of the most prevalent forms of tax fraud involves tax refunds. Some people and even some tax preparation companies attempt to steal income tax refunds from unsuspecting customers. The IRS and tax preparation firms have made an agreement to capture and share information to catch those who try to steal identities in the act.

PIN System

The IRS has begun a personal identification number, or PIN system. A PIN is assigned to each person who uses the internet to file taxes. This PIN must be used to access tax information or to file taxes for the next year. This type of system serves as a passcode system in order to protect from fraud.

Educating Auditors

The large majority of tax fraud that is committed by individuals on their own taxes is under reported income. Auditors are educated on how to look for income that has not been reported and other common methods of tax fraud. Auditors are trained on how to inspect receipts and look for check issues.

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Huddleston Tax CPAs of Seattle & Bellevue
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Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching, Quickbooks consulting, bookkeeping, payroll and business valuation services for small business. We serve Seattle, Bellevue, Redmond, Tacoma, Everett, Kent, Kirkland, Bothell, Lynnwood, Mill Creek, Shoreline, Kenmore, Lake Forest Park, Mountlake Terrace, Renton, Tukwila, Federal Way, Burien, Seatac, Mercer Island, West Seattle, Auburn, Snohomish and Mukilteo. We have a few meeting locations. Call to meet John Huddleston, J.D., LL.M., CPA, Tawni Berg, CPA, Jennifer Zhou, CPA, Jessica Chisholm, CPA or Chuck McClure, CPA. Member WSCPA.