Tax Avoidance or Tax Evasion: A Fine but Important Line

The issue of local, state and federal taxes evokes a range of emotions from people. Often those reactions are influenced in part by a person’s occupation and their understanding of the role of taxes in our economy. In reality, taxes are a necessary element of any civilized society, and the majority of people accept that necessity.

However, there is a great deal of disagreement among individuals about how much they should be taxed. Additionally, there is often confusion about what actions they can or should take to minimize their personal tax liabilities. A small segment of workers take pride in paying their taxes as a patriotic duty and take few steps to lower them. On the other hand, a larger number, particularly in the business community, feel a responsibility to their investors to pay as small an amount of taxes as legally possible.

The key factor in the question of taxes is that of legality. As far as the courts are concerned, any American taxpayer, individual or business, has the full and ethical right to make every effort to legally lower their tax liabilities. Due to the complexity of the Tax Code there are a myriad of ways to achieve that objective. Likewise, failure to pay attention to tax issues can result in paying tens of thousands of dollars – or more – in unnecessary taxes.

Understanding the Details

For those who work in this area, there is a clear distinction between the two terms tax avoidance and tax evasion. Tax avoidance is the pursuit of all ways to avoid paying taxes by use of legitimate methods and regulations. For example, if a business uses a lease to buy a piece of equipment instead of buying it outright, they will generally find this a tax-advantaged transaction. That simply means they pay less in taxes at the end of the year than they would otherwise.

If the discussion turns to tax evasion, this implies taking steps that will lower taxes, but are not allowed by law. Tax evasion carries criminal penalties, and many people have ended up in prison for this practice. Examples of tax evasion include:

• Underreporting income purposely
• Creating sham transactions merely to lower taxes
• Keeping two sets of books and/or doctoring the actual operating results of a company
• Claiming false or inflated deductions and expenses

While tax evasion is often purposeful and fraudulent from the beginning, there is often a fine line between these two approaches to taxes. Financial and accounting experts spend enormous amounts of time and energy in searching out every possible loophole and exemption, and the issues can involve millions of dollars. In many cases, accountants or lawyers will approach the IRS and seek a ruling on a specific issue, seeking to avoid taxes while avoiding any possibility of being guilty of criminal evasion.

The simple fact for every individual and business to understand is that they have the legal right (and even duty for business owners and managers) to legally avoid all the taxes they can. It is often well worth the cost to invest in the expertise of a knowledgeable tax planner, especially when tax liabilities escalate into larger numbers. However, it is seldom worth the risks involved to lower taxes by engaging in any form of tax evasion.

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