Tax law is a section of legal study that tackles matters on constitutional, statutory, tax treaties, as well as common laws that guide on taxation. Tax law deals with regulations, policies, and statutes that oversee the tax process. All charges that emanate from estates, business transactions, income, property, and licenses, are incorporated in the tax law. The Federal Tax Law Rules offer an outline of how the federal government exercises its authority on taxation. Tax authority is normally categorized as either primary or secondary, based on its sources and authority. Federal courts and tax agencies interpret and apply tax law depending on their strength in offering direction and administration of tax.
Primary Sources of Tax Law
Primary sources of tax law are type of documents that the federal agency issues and carry more weight in terms of authority. Primary sources are largely useful in courts, the executive arm, legislature, and state governments, since they possess the highest form of authority. Primary sources based on statutory authority as indicated in the Internal Revenue Code, as well as income tax treaties. Primary sources include Internal Revenue Code (or Code), judicial decisions concerning tax matters, Treasury regulations, revenue rulings, revenue procedures, administrative decisions, and case law. When offering support for a given position in taxation, primary sources possess more authority than secondary sources.
Secondary sources of Tax Law
In tax law, secondary sources are publications drafted by tax experts and legal analysts to educate taxpayers about the law. According to Fishman (2016), secondary sources are not laws by themselves, but rather utilized to interpret and explain primary law to individuals who are not experts in taxation. Secondary sources serve to persuade authority, thus offering the right direction of tax law. Courts are not necessarily compelled to adhere to the secondary sources because they are not drafted legislatively. The core secondary sources include periodical articles, treatises, legal encyclopedia, legal dictionaries, Internal Revenue Service (IRS) booklets, newsletters, and annotated law reports.
To evade situations where individuals could be penalized for an understatement linked to an anonymous position, practitioners must ensure that they satisfy the substantial authority standard based on their position. Substantial authority involves taxpayer’s capacity to defend his/her position based on the weight of authority (Pratt & Kulsud, 2013). Substantial authority is normally applied as a standard during tax preparation where a tax expert is necessitated to support the tax position based on the sources used. Substantial authority is quite strong when tax experts insinuate that a court may favor the taxpayer’s position more than imposing a penalty.
Substantial authority is utilized when a penalty is imposed after a taxpayer has understated his/her income tax during tax return. If a taxpayer’s return indicates a substantial understatement, a penalty of approximately 20% of the amount that has been understated is charged. However, a taxpayer can avoid the penalty of understatement if his/her return indicates a “substantial authority.” This would amount to a substantial understatement, which qualify for a waiver of penalty. The types of documents that qualify as substantial authority during the regulation include the Code, court cases, IRS press releases, and actions on decisions, general counsel memoranda, and other administrative law pronouncements.
Interpretation of Sources of Tax Law
The federal tax law is normally administered through the IRS, under the instructions from the US Treasury. The Internal Revenue Code assists in answering the federal questions concerning tax law (Lederman, 2012). Federal courts interpret the primary sources of law, thus, assisting in understanding it. Courts of Appeals and Supreme Court contributions are quite critical in the development of tax law. A Supreme Court decision surpasses all other decisions in lower courts, but the Congress can challenge its decision by amending the Internal Revenue Code. The Tax Court guarantee taxpayers’ safety while paying taxes, as incidences of overpayment of tax may emerge during taxation process.
The Tax Court can also direct a bankruptcy case raised against a taxpayer by allowing a bankruptcy court to establish the legality of any withheld tax or fine imposed over tax. If there was a case in court prior to the appeal of bankruptcy, the bankruptcy court can determine whether to handle the case or allow the Tax Court to take charge of the bankruptcy case. A special trial court solves disputes that emerge between the IRS and the taxpayers concerning federal income, gift tax, and estate.
The IRS is instrumental in offering guidance concerning tax law. The IRS is a federal government agency that is charged with the collection of taxes, as well as the management of the Code. In the management function, the IRS issues tax forms that compel taxpayers to fulfill their tax obligations. Disputes that result to tax deficiencies usually emerge from inappropriate auditing by the IRS, although they may crop up when taxpayers amend their recovery to claim a refund for the amount they had previously paid (Lederman, 2012). When the dispute emerges from audit, the IRS sends to the taxpayer a letter dubbed “Notice of Deficiency” to enable the taxpayer petition the tax court.
Fishman, S. (2016). Home business tax deductions: Keep what you earn. Berkeley, California : Nolo.
Lederman, L. (2013). What Do Courts Have to Do With It?: The Judiciary’s Role in Making Federal Tax Law. National Tax Journal 65(4), 899-916.
Pratt, J., & Kulsud, W. (2013). Individual Taxation 2013. Boston, MA: South-Western Cengage Learning.