Income tax is a primary source of revenue for governments around the world. In most jurisdictions, the amount of income tax owed is calculated by applying marginal tax rates to taxable income, i.e. gross income reduced by allowable deductions.
The U.S. Internal Revenue Code (IRC) defines the income tax responsibilities of both individuals and corporations. Although personal and corporate taxpayers are encouraged to actively manage their tax liabilities, the burden of complying with tax law falls on taxpayers. Tax fraud and the willful evasion of income tax responsibilities can result in both civil and criminal penalties.
There are several things that individuals and corporations should do to comply with income tax requirements and more effectively manage their tax liabilities:
- Accurate Recordkeeping – Accurate financial recordkeeping is the basis of an effective income tax strategy. From the implementation of a robust accounting system to the routine documentation of receipts and expenses, the ability to maintain accurate financial records is critical for individuals, small businesses and large corporations.
- Regular Tax Planning – Periodic tax planning can significantly reduce your overall tax liability, especially if it is performed before the end of the tax year. In many cases, experienced tax consultants can recommend strategies to reduce taxable income and minimize income tax liability.
- Timely Income Tax Filing – The Internal Revenue Code describes filing requirements for income tax returns and forms. Failure to adhere to these deadlines can result in fines and penalties, so it's important to make sure that required forms are completed accurately and submitted to federal or state tax authorities in a timely manner.