Tax Avoidance - Tax Avoidance Methods - Tax Audits  

 

Tax Avoidance
    by Robert A. Livingston

Tax avoidance involves any action taken to legally minimize taxes due.

For example, a taxpayer may choose alternative tax rates or certain methods of computation which reduce taxes. He may also choose a special way of reporting, or refrain from certain activities to avoid consequential taxation.

Tax avoidance is legal and also encouraged by the law, the courts and the IRS. The IRS does not want the taxpayer to pay more than his required minimum amount. This is why tax preparation assistance is tax deductible.

Yes, the IRS wants the taxpayer to avoid paying more than he should. However, paying less is not so enthusiastically embraced!

If someone illegally avoids to pay their taxes, they are guilty of a federal criminal offense punishable by fines and imprisonment.

So, when tax avoidance methods are implemented by the taxpayer, it is imperative that he understands what is legal and illegal.

For something to be legal it must be founded on law, or derive authority from law, i.e., be interpreted by the courts to be lawful. On the other hand, that which is not authorized by law, or interpreted by the courts to be lawful, is illegal. To form an awareness of legality and illegality with respect to taxes and tax law, additional terms need to be analyzed.

Tax Fraud

Tax fraud is the intentional perversion of the facts to evade the payment of taxes. Tax fraud is illegal. The word 'intentional' is very important. Intentional perversion is perversion that is knowingly or willfully committed.

Tax evasion is the intentional avoidance to pay taxes that are legally due. Tax evasion is illegal.

All tax evasion is tax fraud. If the taxpayer is alleged to have committed tax fraud, the IRS may prosecute the taxpayer in criminal court. There is no statute of limitations for tax fraud. They may prosecute forever, i.e., at any time after the crime is committed.

Tax fraud is a felony. The law has penalties for people convicted of felony charges. They may include a fine, imprisonment, or both.

Also, the IRS may assess a severe monetary penalty on the underpayment they determine to be attributed to fraud (even without court action). Interest is charged from the date the tax became due to the date it is paid or to the date it is assessed whichever is earliest. Of course, the taxpayer may challenge the IRS's assertion of fraud via IRS channels or by litigation.

Tax Mistakes

A tax mistake is an unintentional perversion of the facts, i.e., an omission of information or inclusion of incorrect information. Tax mistakes are usually either an unintentional overstatement of a deduction, e.g., a business expense deduction, an itemized deduction, etc., or the unintentional understatement of income, i.e., tax negligence.

The word 'unintentional' is very important. Unintentional perversion is perversion that is unknowingly or unwillfully committed. Penalties assessed for unintentional perversion are less than penalties for intentional perversion (fraud).

If the IRS thinks a mistake is intentional, they may assume it is fraud (even though it many not be fraud) and assess above mentioned penalties for fraud and/or prosecute in criminal court. If a tax mistake is proven to be intentional via the judicial system, it is no longer a mistake, but fraud.

The taxpayer would try to minimize mistakes since there is always the possibility that the IRS may think an unintentional mistake was done with willful knowledge. Although it is improbable, it is possible that even an objective disinterested court of law could decide that an unintentional mistake was to the contrary--the consequences could be alarming!

If a taxpayer has intentionally changed or distorted facts, or if there is the possibility that a mistake could be determined to be intentional on a return or returns already submitted, voluntarily reporting this to the IRS does not alter the fact that fraud has been committed. The IRS can still prosecute. In cases of fraud they can prosecute anytime after the fact, i.e., there is no statute of limitations.

The unintentional overstatement of a deduction will be disallowed by the IRS. They will assess the resulting taxes plus interest (interest is charged from the original date that the tax should have been paid). The interest charged on the assessment due is usually less than the rate at which money is ordinarily borrowed.

Also, if the IRS fails to locate and asses an unintentional overstatement of a deduction within the statute of limitations period, the assessment is not allowed.

Tax Negligence

Tax negligence results from the unintentional understatement of income. If the IRS finds that a taxpayer has been negligent, they may make him pay a penalty fee in addition to the assessment plus interest. The penalty is applied to the entire tax underpayment (which is other than fraud--fraud is always penalized as fraud and not just to the portion attributed to negligence).

Interest is charged from the date the tax became due to the date it is paid or to the date it is assessed whichever is earliest.

Of course, the taxpayer may challenge the IRS's assertion of negligence via IRS channels or by litigation...

The above is only a partial example excerpt...

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Tax Avoidance--A Closer Look

 
Tax Avoidance Methods
    by Robert A. Livingston

The taxpayer's question is, "What is the best and most advantageous means to legally avoid taxes?"

To answer this question the taxpayer must develop a tax avoidance strategy.

The proper strategy is developed by first knowing the basics--and then by focusing in on the specifics that offer the most benefit.

Here is a list of the general ways allowed by tax law to reduce taxes due. Taxes due can be reduced if the taxpayer:

1) Deducts all allowable income exclusions, i.e., the legal income exclusions which do not have to be reported in gross income,
2) Subtracts all the qualifying deductions to gross income,
3) Deducts, from adjusted gross income, all the itemized deductions total, or the standard deduction, whichever is greater,
4) Uses all of qualifying exemptions for dependents, and
5) Deducts all qualifying tax credits from the tax amount listed in the tax table that relates to the taxpayer's particular taxable income.

These 5 general ways to reduce taxes due are called tax avoidance methods.

Although all tax avoidance methods available should be utilized, advice on how to employ many of them can only be administered proficiently if the advisor has specific knowledge of the taxpayer's unique tax circumstances. It would seem, then, that every taxpayer would have to get costly, personal, one-on-one advice from a competent tax attorney. In fact, to exercise many of the tax avoidance methods available, this would be the case. But, for most taxpayers, the numerous methods with their inherent complications need not be employed to save sizable tax dollars. If the right methods are used most of the headaches and legal costs are also minimized.

The taxpayer who desires to legally pay little or no tax must learn these methods and make the tax laws work for him. But he must not, in his zeal to legally avoid taxes, illegally evade taxes!

Business Losses

One of the most important allowable deductions, is a deduction to gross income called the 'business loss.' And it is often the one deduction that allows the average taxpayer the greatest potential benefit.

To understand the phrase "business losses," other related words and phrases must be defined and understood.

A business, according to tax law, is an activity engaged in with the intention of making a profit. Therefore, a profit may not have to be realized--at least not immediately. The reason "may not" is mentioned is because the IRS evaluates activities that are claimed to be for business purposes on an individual basis.

The gross income of a business is the summation of all receipts realized during the tax year which increase the value of the business.

Business expenses include any outflow of money which is an ordinary and necessary business expenditure.

Business profit or loss is the figure arrived at by subtracting business expenses from business receipts. If this remainder is negative, it is a business loss.

Look at Form 1040 where a businessman enters his business profit…this is also where a businessman enters his business losses.

Business losses of a sole proprietorship are subtracted from the sum total of all the incomes the person receives, i.e., the person's gross income.

For example, if the taxpayer is a carpenter and at the end of the tax year has a $30,000 income from carpentry, a $50 income from savings account interest, and a $3,000 loss from being a musician on the weekends, his gross (total) income would be ($30,000 + $50) - $3,000 = $27,050. The money lost as a musician is a business loss. It is reported on Form 1040.

By reporting losses in the side-business of being a musician, the taxpayer has saved paying the tax on $3,000. And, if this deduction causes him to be in a lower tax bracket, he would reap even more tax savings.

Losses can only be fully deducted if they are, in fact, business losses (as opposed to non-business personal losses). A business loss occurs if expenses exceed income in an endeavor where the taxpayer was in business with the intention of making a profit, i.e., he had a profit motive intention. This is true even if it is not his primary occupation.

For example, "secondary" occupations may include: songwriter, singer, dancer, actor, talent manager, talent agent, etc..

The "profit motive intention" is the most important factor when determining if an endeavor is actually a business instead of just a personal hobby...

The above is only a partial example excerpt...

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Tax Avoidance--A Closer Look

  

  

  

 

 

Tax Audits
    by Robert A. Livingston

A tax audit is a meeting where the taxpayer meets with the IRS and attempts to prove his return is correct and legal.

Having A Tax Audit?

Don't panic! Here are some tips:
1) Do not fear the IRS.
2) Assess your ability to decipher what it is that is being questioned by the IRS.
3) Assess your ability to decipher what it is your return conveys from a standpoint of the law.
4) Assess your ability to be calm under fire.
5) Assess your ability to present your best proof or argument.
6) Assess the amount of time and/or money it will take to prove your position and weigh that cost against the amount of additional tax you may be required to pay.
7) If you do not feel in command of the situation, consider having a competent agent represent you. Weigh this cost against the tax amount that could be assessed. Remember, the cost of an agent representative is 100% deductible on your current year's return.
8) If you decide to represent yourself, review the return the IRS is questioning.
9) List the items for which you do not have adequate proof.
10) Try to procure adequate proof, i.e., legal proof of your non-supported or weakly supported deductions.
11) If adequate records cannot be established, prepare a sound argument to support your claim.
12) Write your complete argument out on paper. Study it, refine it. If possible, put it away for a couple days and then look at it afresh. Correct any flaws. Let someone you feel is more knowledgeable in tax law read your argument. Refine it again and study it.Your ability to convince the IRS representative that your position is the correct one on your first meeting is of paramount importance.
13) Remember, whatever the outcome, the experience will undoubtedly help you in the future.
14) Take a long well deserved vacation (hopefully not in a penal institution!).

And don't forget... Tax avoidance is legal and encouraged by the IRS. Tax mistakes are only minor infractions (but could turn into big headaches if the IRS alleges fraud) and must be found by the IRS within the legal statute of limitations time period or additional assessments are disallowed. And tax fraud, which includes tax evasion, is illegal and the IRS can prosecute forever for this felony criminal offense.

It should be noted that federal and state tax laws often change. Also, court decisions concerning seemingly similar matters sometimes differ from court to court.

To make matters even worse, the IRS is not usually held accountable for giving out false information when the taxpayer asks for their advice!

However, in a situation where the taxpayer was given misinformation he would not be held accountable for intentional perversion of the facts, i.e., fraud, since he was misadvised by the IRS (that is, if he is able to prove that he was misadvised--the experienced taxpayer always gets IRS advice in writing).

As one can see, legalities with respect to tax law can be very complicated. For information concerning specific problems, a taxpayer can call the IRS Tax Information Service. Their current number can be acquired by calling information and asking for the IRS toll free 800 number. Or, other detailed information may be obtained online via tax publications #1, #334, #556, #586A, and #594.

The taxpayer must always remember that the IRS interprets the tax laws. Their interpretation is not always proper and legal. A taxpayer that is not satisfied with advice received by the IRS could consult a competent tax attorney for a second written opinion. The taxpayer must always remember that if he uses the advice of another he must get it in writing to be able to protect himself if the subsequent action he takes (because of someone else's advice) is challenged in court.

Please also remember that this article is intended to convey information only, and should not be construed as advise. If expert assistance is needed, a competent professional should be consulted.

In conclusion, remember that disagreements with the IRS may be settled in various ways. There is often room for negotiation. A tax attorney can best represent the taxpayer in such cases.

Final and binding interpretations of tax law are, however, made by the courts--NOT the IRS. The cost to the taxpayer for court litigation, however, may be the deciding factor. That is to say, if the taxpayer simply pays a disputed tax assessment it may be less expensive than paying the attorney's fees and court costs if a court decision should go in the favor of the IRS!

The above is only a partial example excerpt...

If you happened on this web page while surfing the Internet, and are interested in reading the full discussion, that discussion is found on the LaCostaMusic.com TMBIO Members Website...

Join TMBIO

Then Go To This Web Page to Read the Full Commentary:

Tax Avoidance--A Closer Look