Depending on who you ask, some people may say that tax avoidance is either “smart business” or it’s “immoral”. But, if done correctly, there’s one thing it’s not…It’s not illegal. There are numerous ways that a person can decrease his or her tax liability legally: 1. Claiming deductions 2. Incorporating. 3. Setting up a charitable trust or foundation.
More complicated and controversial methods include setting up an offshore company, trust or foundation in an offshore jurisdiction. Tax evasion, on the other hand, is the willful act of misrepresenting financial information to avoid the tax liability. Common forms of tax evasion are understating income, wages or gains on the sale of property and/or overstating tax deductions.
What’s the Difference? To keep it simple – think of it this way: Tax avoidance is the maneuvering to avoid the tax liability in the first place. The tax does not exist, because in a legal sense, no income, profit or gain ever existed. Tax evasion is maneuvering to avoid the payment of a tax liability that has already been created. The tax exists because the income, profit or gain already exists. To avoid paying the tax is a criminal act.
Why Would the Government Allow Tax Avoidance? Obviously, no government could function if all its citizens legally avoided paying taxes. While there are legal means of tax avoidance that every citizen has a right to put into practice, there are also “abusive tax avoidance strategies” that the IRS warns against openly. These include: a. Anti-Tax Law Schemes b. Abusive Home-Based Business Schemes c. Abusive Trust Schemes d. Misuse of the Disabled Access Credit e. Abusive Offshore Schemes f. Employee Plans Abusive Tax Transactions g. Exempt Organization Abusive Tax Avoidance Transactions.
The IRS tows a hard line with the promotion of Illegal Tax Schemes posing as Legal Tax Avoidance Strategies.
Tax Avoidance has always had its share of hucksters and scam artists who appeal to the “greed mechanism” present in some taxpayers, by selling “get out of paying tax legally” kits and seminars.
If Your Name is On a List of a Tax Shelter Promoter—The IRS is Watching You. In a recent effort to cut down on abusive tax avoidance scheme, the Department of Justice is now requiring promoters of tax shelters to make their list of clients available to the IRS. If called upon, these promoters must give names as well as details of the transactions. For abusive tax schemes, this provision has proven to be an effective means for the IRS catching not only the promoter…but also the clients.
Do What’s Right…But Get Legal Help If You’re Unsure. If you’ve participated in a tax avoidance strategy and you find yourself questioning if it was legal, don’t wait to find out “the hard way”. Remember, even if you’ve been involved in an illegal tax avoidance scheme, you can still make restitution for your actions without it ending up in a jail sentence. But there’s no question that you’ll need competent legal help in this situation.