Question

1. Explain the 3 types of penalties and give 3 examples of when a penalty might apply.

2. What are the 2 categories of anti-avoidance provisions? Explain each one.

3. Explain the following terms and how they affect an individual taxpayer
   1. Capital Gains Tax
   2. Fringe Benefits Tax
   3. Employment Termination Payments

Answer 1

Taxpayers may face various penalities for failure related to Federal, state and local tax issues. Three types of tax penalities in US are:

1. Underpayment penalities: One faces such penalty if by the end of the tax year (Dec 31) he/she haven't paid either 90% of the owed amount for the tax year or an amount equal to 100% of the tax liability for the prior year whichever is smaller.

2. Failure to file penalty: If tax is not filed by April 15 or even automatic extension is not filed by that date, penalty of upto 25% of owed amount.

3. Failure to pay penalty: If the owed amount is not paid by April 15, this penalty capped at 25% of the owed amount will be charged.

The 2 categories of anti avoidance provisions are:

1. Legislative Anti Avoidance Provisions: Here two types of statutory anti avoidance measures exists: GAAR and SAAR. The GAAR as its name implies is a set of general anti avoidance measures which is "catch all" for tax avoidance. The SAAR is a specific anti avoidance rule and is targeted at curbing a specific avoidance practice or technique.

2. Administrative Anti Avoidance Provisions: These are mainly to ensure compliance and/or to detect tax avoidance. They are mainly carried out in folllowing ways:

a) Using investigative powers under GAAR

b) Using adminsitrative powers to build a common law avaoidance case where no GAAR exists

c) Using tax payer alerts and rulings

d) Appointing GAAR panels to discuss GAAR issues

Capital gains tax: It is tax on the positive differnce between the sale price of the asset and its original purchase price. It applies to capital assets only like stocks , bonds, jewellery, real estate propoerty etc. They are long term capital gains tax is if the asset is held for more than 1 year. The rates 0%, 15% or 20% depends upon tax bracket. Short term capital gains tax applies to assets held for year or less and is taxed as ordinary income.

Fringe Benefit Tax: It is the tax that an employer has to pay in lieu of the benefits that are given to his/her employees apart from their basic compensation like housing allowance, vehicle, educational assistance, vacation pay etc . It was an attempt to levy taxes on those benefits which evaded the taxman. In US, the gross taxable income includes everthinh the employee receives from the employer in connection with performance of services. Any fringe benefit received will be taxable, unless it is specifically non taxable as per the tax code.

Employee termination payments: When a person leaves the job voluntarily or due to layoff, they get severance pay or other owed compensation. It is taxable . Employees and employers both pay 6.2% social security tax and a 1.45% medicare tax on person's wages. Employers are required to withhold 22% of the severance wages and pay the money to IRS.