In the past couple of weeks and considering the president’s actions – or inactions as the case may be – in regard to his taxes, may still be leaving some individuals and business-owners alike, confused about the legality of things. Or especially if it would be considered tax evasion.
There are some key features and distinctions that are important to note, here.
Tax planning is the process of elaborating the company’s financial related matters to maximize the tax benefits under eligible provisions of the tax framework. The planning assists taxpayers to lessen their tax liability through a variety of means, namely deductions, credits, rebates and exemptions provided under the corresponding tax laws.
A key feature of tax planning is its relation to the future. An efficient tax planner of the company with a good tax planning in hand may facilitate the tax minimization in either short term or long term. To bring the best possible outcome for the tax perspective, effective tax planning should bring below some essential elements into consideration:
- Choice of business entity
- Timing of Income
- Business Size
- Planning for Expenditures and Purchases
- The Residency Status of the Business Owner and Where the Business Operates
- Capital Structure of the Business
Tax avoidance is where some individuals and business owners may have some issues or feel especially concerned. As legal citizens and permanent residents of the United States, it is a duty and requirement to pay taxes, but naturally taxpayers want to save as much as – legally – possible. Tax avoidance may seem dubious or questionable, but it is all still part of effective tax planning.
Tax avoidance is the act of minimizing tax liability within the limits of the law or without breaking the law. In other words, taxpayers can use legitimate methods to reduce the amount of tax payable in association with their financial activities. Such methods to allow taxpayers to avoid paying tax to the government may include the followings:
- Using tax deductions for decreasing business expenses and business tax bill
- Delaying the payment of tax until a later date with an appropriate tax deferral plan
- Taking advantage of tax credits for legal purposes like business purchases, benefiting the company’s employees for sick leave and family leave.
- Sheltering revenue from tax liability through the establishment of employee retirement plans.
The key takeaway here is that what makes these things – tax planning as well as tax avoidance – legal is always going to be to ask yourself the purpose doing it, which should always be to maximize your savings in an efficient way, and not merely to try and “get over” on the government. Some taxpayers may consider loopholes a convenient form of getting away with something that everyone does, but, here, it becomes important to consider the nature and timing of everything as well: If you – or preferably a tax professional search for and apply tax loopholes that are legal, and do so before the tax liability becomes due – and you can prove everything as legitimate, you’ll most likely be audit-proof.
Anything else is tax evasion.
Tax evasion is any illegal method or unlawful attempt to reduce tax liability of taxpayers. It is highly attached to techniques or illicit practices which results in showing fewer profits to minimize the individual or company’s tax burden.
Examples of tax evasion usually include the following:
- Making false statements and information
- Inflating deductions without legal proof
- Hiding related documents to prove the earned business profits like records of transactions or report of cash income
- Concealing or transferring assets illegally
- Magnifying tax credit
- Claiming excessive expenditure
Tax evasion is a form of tax fraud which indicates illegitimate and deliberate actions for not paying taxes. Since employing such unfair means is fraudulent, any taxpayers regardless of individual or business committing tax evasion behaviors would be subject to statutory punishment such as a heavy fine or imprisonment.
Contact Dunham Tax Professionals if you have any questions about this or any other tax concerns.