Question

Raising revenue for government is only one of the reasons for income taxation and the provisions that are part of it. What's another reason?

Can you name a provision of the income tax that you believe was imposed to accomplish the reason you listed?

The AICPA has issued standards for CPAs in tax practice, called Statements on Standards for Tax Services (SSTS) .

What does the SSTS say about a CPA relying on information supplied by the client (see SSTS #3)? Are estimates ever permitted to be used in preparing a tax return (see SSTS #4)?

Answer 1

Raising revenue for the government to be utilized in nation-building and social welfare is one of the reasons and the primary reason for income taxation. Another reason for imposing income tax is reducing economic inequalities in the population and promoting equity. Since income tax is a percentage of earnings, higher earnings means higher taxes (higher contribution in nation-building) and lower earnings mean lower taxes (the lower income group gets respite in terms of lower contribution and reaps proportionately more benefits from the Government’s programs).

A provision that seeks to accomplish this objective is the progressive taxation policy, wherein, higher incomes are progressively subject to higher income tax rates. This ensures that the higher-income group does not pay the same percentage of their earnings as the lower-income group, but pays a higher percentage of their earnings as income tax. This helps bridging economic inequalities over time.

SSTS No. 3, on procedural aspects of preparing returns, states that CPAs preparing tax returns on behalf of their taxpayer clients may in good faith rely, without verification, on the information supplied by their clients in preparation of their clients’ tax returns. However, they must probe further for supporting documents when certain statements by clients seem incorrect, insufficient or inconsistent on the face of it. For deductions claimed by taxpayer clients based on certain conditions to be met, the CPAs must make appropriate inquiries to their satisfaction that the conditions in question have been met.

SSTS No. 4, on use of estimates, provides that in certain circumstances CPAs may use estimates provided by their clients such that the estimates do not destroy the accuracy of the tax return. In certain situations where exact amounts cannot be ascertained, such as small expenditures or where records are missing or precise information about a transaction is not available, estimates are allowed but with a fair degree of factual accuracy. The estimates should not be so far away from actual that they distort the tax returns. Further, where estimates are used in unusual circumstances such as fire breakout and resultant loss of business records, such unusual circumstances must be disclosed.