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Tax Avoidance Is Legal; Tax Evasion Is CriminalIndividuals and business owners often have more than one way to complete a taxable transaction. Tax planning evaluates various tax options to determine how to conduct business and personal transactions in order to reduce or eliminate your tax liability.Although they sound similar "tax avoidance" and "tax evasion" are radically different. Tax avoidance lowers your tax bill by structuring your transactions so that you reap the largest tax benefits. Tax avoidance is completely legal—and extremely wise.Tax evasion, on the other hand, is an attempt to reduce your tax liability by deceit, subterfuge, or concealment. Tax evasion is a crime.How do you know when shrewd planning—tax avoidance—goes too far and crosses the line to become illegal tax evasion? Often the distinction turns upon whether actions were taken with fraudulent intent.Business owners often find themselves subject to more scrutiny than wage-earners with a similar level of income. Why? Because a business owner has more options to avoid tax, both legally and illegals. Here are some of the most common criminal activities in violations of the tax law:Deliberately under-reporting or omitting income. This is self-explanatory: concealing income is fraudulent. Examples include a business owner's failure to report a portion of the day's receipts or a landlord failing to report rent payments.Keeping two sets of books and making false entries in books and records. Engaging in accounting irregularities, such as a business's failure to keep adequate records, or a discrepancy between amounts reported on a corporation's return and amounts reported on its financial statements, generally demonstrates fraudulent intent.Claiming false or overstated deductions on a return. These range from claiming unsubstantiated charitable deductions to overstating travel expenses. It can also include paying your children or spouse for work that they did not perform. The IRS is always vigilant when it comes to inflated deductions from pass-through entities.Claiming personal expenses as business expenses. This is an easy trap to fall into because often assets, such as a car or a computer, will have both business and personal use. Proper record-keeping will go a long way in preventing a finding of tax fraud.Hiding or transferring assets or income. This type of fraud can take a variety of forms, from simple concealment of funds in a bank account to improper allocations between taxpayers. For example, improperly allocating income to a related taxpayer who is in a lower tax bracket, such as where a corporation makes distributions to the controlling shareholder's children, is likely to be considered tax fraud.Engaging in a "sham transaction." You can't reduce or avoid income tax liability simply by labeling a transaction as something it is not. For example, if payments by a corporation to its stockholders are in fact dividends, calling them "interest" or otherwise attempting to disguise the payments as interest will not entitle the corporation to an interest deduction. As discussed below, it is the substance, not the form, of the transaction that determines its taxability.The IRS Criminal Investigation Division is not to be trifled with, as any number of high-profile individuals, from Al Capone to Wesley Snipes, know only too well. But, in addition to the rich and famous who make the news, there are hundreds of convictions of businessmen and businesswomen who attempted to evade payment of taxes.ExampleExample. An Ohio business man was sentenced to six months in prison, six months of home detention, and two years supervised release for attempting to evade nearly $170,000 in income taxes. He received income in the form of wages, non-salary payments, and corporate payments for his personal expenses. The personal expenses included: property tax and utility payments for his personal residence, as well as payments for a new furnace, air conditioner, air cleaner and humidifier; a down payment and loan payments for his daughter’s car; payments of his wife’s automobile insurance and car repair bills, college tuition payments for his nephew, as well as other personal expense payments.Example. The sole proprietor of a plumbing shop was sentenced to 13 months in prison, three years of supervised release for tax evasion and ordered to pay approximately $130,000 in restitution to the IRS. The business owner willfully attempted to evade paying his federal income taxes by skimming gross receipts of his plumbing business and paying personal expenses from his business accounts and claiming them as business expenses.As part of his tax evasion scheme, he instructed several of his employees to solicit checks from clients payable in his name, rather than in the name of the business. He then cashed these checks and did not deposit the monies into his business’ bank account. Since this money was not recorded on the books of the business, nor deposited into the business’ account, he did not include these gross receipts on his income tax return. He also deducted personal expenses as business expenses and similarly lowered the figures on his Schedule C profit, thereby substantially reducing his tax for tax years 2003 through 2006.ExampleThe owner of several Illinois tobacco stores was sentenced to 76 months in prison and was ordered to pay $4.8 million in restitution to the State of Illinois and $650,452 to the United States after he pled guilty to deliberately hiding and failing to report cash receipts from business. He had deposited less than one percent of $60 million in cash receipts into his corporate bank accounts and declared little, if any, of those cash receipts on his corporate tax returns.In addition he either filed false federal income tax returns or failed to file federal income tax returns for the years at issue. He also filed false Illinois sales tax returns. He used the unreported income to fund a lavish lifestyle in Lebanon, where he spent considerable time and built a luxurious home, purchased a farm worth hundreds of thousands of dollars, and became a successful owner of a soccer club.https://www.bizfilings.com/toolkit/research-topics/managing-your-taxes/federal-taxes/tax-avoidance-is-legal-tax-evasion-is-criminalTax evasion. There are consequences.

Tax Avoidance Is Legal; Tax Evasion Is CriminalIndividuals and business owners often have more than one way to complete a taxable transaction. Tax planning evaluates various tax options to determine how to conduct business and personal transactions in order to reduce or eliminate your tax liability.Although they sound similar "tax avoidance" and "tax evasion" are radically different. Tax avoidance lowers your tax bill by structuring your transactions so that you reap the largest tax benefits. Tax avoidance is completely legal—and extremely wise.Tax evasion, on the other hand, is an attempt to reduce your tax liability by deceit, subterfuge, or concealment. Tax evasion is a crime.How do you know when shrewd planning—tax avoidance—goes too far and crosses the line to become illegal tax evasion? Often the distinction turns upon whether actions were taken with fraudulent intent.Business owners often find themselves subject to more scrutiny than wage-earners with a similar level of income. Why? Because a business owner has more options to avoid tax, both legally and illegals. Here are some of the most common criminal activities in violations of the tax law:Deliberately under-reporting or omitting income. This is self-explanatory: concealing income is fraudulent. Examples include a business owner's failure to report a portion of the day's receipts or a landlord failing to report rent payments.Keeping two sets of books and making false entries in books and records. Engaging in accounting irregularities, such as a business's failure to keep adequate records, or a discrepancy between amounts reported on a corporation's return and amounts reported on its financial statements, generally demonstrates fraudulent intent.Claiming false or overstated deductions on a return. These range from claiming unsubstantiated charitable deductions to overstating travel expenses. It can also include paying your children or spouse for work that they did not perform. The IRS is always vigilant when it comes to inflated deductions from pass-through entities.Claiming personal expenses as business expenses. This is an easy trap to fall into because often assets, such as a car or a computer, will have both business and personal use. Proper record-keeping will go a long way in preventing a finding of tax fraud.Hiding or transferring assets or income. This type of fraud can take a variety of forms, from simple concealment of funds in a bank account to improper allocations between taxpayers. For example, improperly allocating income to a related taxpayer who is in a lower tax bracket, such as where a corporation makes distributions to the controlling shareholder's children, is likely to be considered tax fraud.Engaging in a "sham transaction." You can't reduce or avoid income tax liability simply by labeling a transaction as something it is not. For example, if payments by a corporation to its stockholders are in fact dividends, calling them "interest" or otherwise attempting to disguise the payments as interest will not entitle the corporation to an interest deduction. As discussed below, it is the substance, not the form, of the transaction that determines its taxability.The IRS Criminal Investigation Division is not to be trifled with, as any number of high-profile individuals, from Al Capone to Wesley Snipes, know only too well. But, in addition to the rich and famous who make the news, there are hundreds of convictions of businessmen and businesswomen who attempted to evade payment of taxes.ExampleExample. An Ohio business man was sentenced to six months in prison, six months of home detention, and two years supervised release for attempting to evade nearly $170,000 in income taxes. He received income in the form of wages, non-salary payments, and corporate payments for his personal expenses. The personal expenses included: property tax and utility payments for his personal residence, as well as payments for a new furnace, air conditioner, air cleaner and humidifier; a down payment and loan payments for his daughter’s car; payments of his wife’s automobile insurance and car repair bills, college tuition payments for his nephew, as well as other personal expense payments.Example. The sole proprietor of a plumbing shop was sentenced to 13 months in prison, three years of supervised release for tax evasion and ordered to pay approximately $130,000 in restitution to the IRS. The business owner willfully attempted to evade paying his federal income taxes by skimming gross receipts of his plumbing business and paying personal expenses from his business accounts and claiming them as business expenses.As part of his tax evasion scheme, he instructed several of his employees to solicit checks from clients payable in his name, rather than in the name of the business. He then cashed these checks and did not deposit the monies into his business’ bank account. Since this money was not recorded on the books of the business, nor deposited into the business’ account, he did not include these gross receipts on his income tax return. He also deducted personal expenses as business expenses and similarly lowered the figures on his Schedule C profit, thereby substantially reducing his tax for tax years 2003 through 2006.Keep in mind that tax evasion isn't limited to federal income tax. Tax evasion can include federal and state employment taxes, state income taxes and state sales taxes as well. The following example illustrates this.ExampleThe owner of several Illinois tobacco stores was sentenced to 76 months in prison and was ordered to pay $4.8 million in restitution to the State of Illinois and $650,452 to the United States after he pled guilty to deliberately hiding and failing to report cash receipts from business. He had deposited less than one percent of $60 million in cash receipts into his corporate bank accounts and declared little, if any, of those cash receipts on his corporate tax returns.In addition he either filed false federal income tax returns or failed to file federal income tax returns for the years at issue. He also filed false Illinois sales tax returns. He used the unreported income to fund a lavish lifestyle in Lebanon, where he spent considerable time and built a luxurious home, purchased a farm worth hundreds of thousands of dollars, and became a successful owner of a soccer clubMinimizing Taxes Requires Skillful Tax PlanningTax avoidance requires advance planning. Nearly all tax strategies use one (or more) of these strategies to structure transactions to obtain the lowest possible marginal tax rate:minimizing taxable income;maximizing tax deductions and tax creditscontrolling the timing of income and deductionsForecasting income and expenses is critically important. Effective tax planning requires solid estimates your personal and business income for the next few years. Several years of income/expense projections are necessary because many tax planning strategies that lower taxes at one income level can result in an increase if income raises in the coming years.You will want to avoid having the "right" tax plan made "wrong" by erroneous income projections. You should already be projecting your sales revenues, income, and cash flow for general business planning purposes, so you should have much of this information available for tax planning While estimates by their nature are inexact, the more accurate you can be, the better your planning will be.Deductions and Credits Reduce Your TaxesYour tax planning goal is to pay the least amount of tax that is legally possible. You can reduce your ultimate tax bill by attacking on two fronts.First, take full advantage of every available deduction—both business and personal—to reduce your taxable income.Then, once determine the tentative tax due, claim every tax credit that is available to you.Think AheadWhen you want to reduce the amount of tax that you owe, you will find that tax credits are nearly always better than tax deductions.A credit reduces your tax bill dollar-for-dollar, whereas the value of a deduction is affected by your marginal tax rate. This is an important principle to remember when evaluating whether it is better to claim a credit or a deduction when both are available for a given expense.Claiming Deductions Minimizes Taxable IncomeTo reduce your taxable income, you must be aware of what is deductible and what isn't. You also need to know the special rules that apply to certain types of deductions, such as entertainment expensesautomobile expensesbusiness travel.In many cases, a business owner can deduct benefits that would be considered nondeductible personal expenses for an employee.Examples would be business use of a computer or business use of the family car. Don't overlook the possibility of purchasing health insurance, investing for your retirement, or providing perks like a company car through your business.WarningKnow the rules regarding which expenses are deductible and make sure to document them properly. Over-exuberant payment of personal expenses from business funds is a red flag for audits and may be considered proof of tax fraud.Consider the big picture when claiming deductions. Claiming certain types of deductions can have a tax impact in later years.One example is electing to expense (deduct) the entire cost of a business asset in the year of purchase. While this will lower your tax liability for the current year, you will not be able to claim depreciation deductions in the future. If you anticipate your business income increasing in the future, you may want to scale back the current deduction so that you can claim depreciation deductions in future years.Tax Credits Shave Dollars Off Your Tax BillOnce you have claimed every tax deduction that you can, turn your attention to uncovering every possible tax credit that you can claim.As noted earlier, tax credits are generally better for you than deductions because credits are subtracted directly from your tax bill. Deductions, in contrast, are subtracted from the income on which your tax bill is based.Work SmartA dollar's worth of tax credit reduces your tax bill by a dollar. However, a dollar's worth of deduction lowers your income by the percentage amount of your marginal tax bracket. So, a dollar's worth of deduction is worth only 35 cents if you're in the 35 percent bracket; it's value drops to 25 cents if you're in the 25 percent bracket.In fact, the more you reduce your taxable income, the lower your bracket and the less valuable each additional deduction becomes. This means that you should definitely be aware of potential credits and what is required to claim them. And, in cases where you have a choice between claiming a credit or a deduction for a particular expense, you're generally better off claiming the credit.As wonderful as tax credits can be, with tax law there's almost always a catch. In this case, the catch is that many tax credits are available only in certain, very limited situations.Most federal income tax credits currently available to business owners are very narrowly targeted to encourage you to take certain actions that lawmakers have deemed desirable. Examples include credits designed to motivate you to make your company more accessible to disabled individuals or to provide health insurance to your workers.Other credits apply only to certain industries, such as restaurants and bars, or energy producers. There are also a few credits designed to prevent double taxation, and a few designed to encourage certain types of investments that are considered socially beneficial.In addition, the forms and procedures used to calculate and claim business tax credits often are quite complicated. While we do provide an outline of the basic rules, so you can decide whether to pursue a credit, we recommend that you leave the technical details to your tax professional. because the reduction in taxes may well compensate you for the aggravation in claiming them. That said, you still should aggressively explore and exploit any tax credits that apply to you.Aim for Lowest Possible Marginal Tax RateThe federal income tax is a progressive system. Now, in tax talk, that doesn't mean forward-looking or innovative. It means that different levels of income are taxes at "progressively" higher rates. One goal of tax planning to lower your taxable income, so you are taxed in a lower tax bracket with lower tax rates.The federal income tax is designed to tax higher levels of income at higher tax rates. A "tax bracket" refers to the highest marginal tax rate that you pay on any part of your taxable income. This is the rate that will apply to each additional dollar that you earn, until you earn so much that you graduate to the next bracket.If you operate your business as a sole proprietorship, an LLC that has not elected to be taxed as a corporation, a general partnership, or an S corporation, your business income "passes through" to your personal income tax form and is taxed at the individual tax rates. If you operate your business as a regular corporation, the corporation pays its own taxes at the corporate tax rates (which may be lower than your individual rate) and you are taxed only on income received from the corporation.