TAX - Avoid at Your Peril

"The high levels of taxation in any country is usually directly attributable to the high evasion levels in that country."

"Avoid, evade, what's the difference, as long as you don't pay taxes".

This is the philosophy of many Americans today. But it is not one that any of us should necessarily agree with. The facts are that someone has to pay for our roads, our children's education, our welfare system and our law enforcement - and so on.

But paying more than your legal share? …Now that’s a different story.

Tax Avoidance is an "industry” that never stops growing. For many it’s "the game to play". People and businesses have become so tired of high taxes that they often decide to fight back.

Whatever your views and whatever you do, keep in the area of Avoidance. Keep out of the area of Evasion.

Evasion and Avoidance – what’s the difference?
Evasion has never been an acceptable method of reducing one's tax bill.

Tax Evasion is tax theft. It is where one wilfully attempts to evade their legal liability for tax by providing false information and records or omitting things that should have been disclosed. To constitute evasion, there must have existed the intention to deceive.

Avoidance is quite different. There is no deceit.

It is the legal and logical arrangement of one's affairs so that full advantage is taken of all the favourable terms and allowances available under Tax Law and by doing so their final tax to pay is less than it would otherwise be.

Tax Evasion is an old game
The high levels of taxation in any country is usually directly attributable to the high evasion levels in that country.

Evasion has been practised since the first rulers started to levy a head tax. In ancient Greece, tax evasion was a capital offence while the French regard tax evasion as a citizen's duty. But while in ancient times they evaded head tax by hiding their slaves under a bushel, today's unscrupulous evaders are able to employ top tax accountants to use every available device to pay less.

There is always the group that regard all taxation as theft and no one is able to convince them otherwise. They view evasion as being smart rather than a crime. They work on the principle of rendering unto Caesar only that which cannot be hidden from him.

Some tactics people use to evade
Evasion comes in many forms. It is far easier for the self-employed and big businesses to evade tax, than it is for the ordinary salary and wage earner.

Here are just a few methods some use:

  1. Retailers who "skim" money by taking cash from the till. This "suppresses sales", reduces taxable profit and lowers tax to pay.

  2. Deliberately reducing the true accounts receivables (reduces money owing to the business thus reducing taxable income)

  3. The swap of cash for goods or services. This is difficult to trace as it does not show in the bank account so sales are hidden from the Tax Man.

  4. Under valuation of the stock figures. Although this reduces the year’s taxable profit, it is only a temporary deferral measure.

  5. Charging expenditure to the business that has not been legitimately incurred in producing the income of the business. That is, straight out theft or fraud.

There is more - much kmore.

What about tax planning?
Any tax plan created for the purpose of minimising taxation must take into account the complex play between law, tax and business. Taxation is a very complex subject. There are many pitfalls. Constant changes in tax law can easily leave many accountants and lawyers far behind in their attempts to keep up with the play.

In tax planning there is no substitute for a team effort between the accountant, lawyer and the client to produce a carefully researched plan that would be acceptable to any scrutiny from the Internal Revenue Service. Where necessary request a ruling from the Tax Man before proceeding.

Any proposal should be examined thoroughly for unforeseen side effects before its final implementation. Remember, the best of plans need to consider the possible effects of the failure of that plan. The Tax Act gives the IRS wide powers for upsetting schemes and plans which do not meet with the requirements of legislation.

Clients must be forewarned that they may possibly have to fight every inch to hang onto any tax advantages that may occur from a particular plan or scheme.

How to test yourself for Evasion or Avoidance
You can test whether your proposed plan amounts to evasion or avoidance by answering the following questions honestly:

Would you carry out your plan if the tax savings were not likely?

  • If yes, - more likely it will be seen as avoidance
  • If no - ask the following further questions

What are my reasons for entering into this "plan or scheme"?

  • For protection against insolvency or for other sound business reasons – if for these reasons, then it’s more likely that it would be viewed as avoidance

  • If your reasons are mixed, ask yourself whether you have 3 good reasons why it makes good commercial sense to enter into the arrangement, aside from tax reduction. If you have 3 you are probably outside the law or at least you will have ammunition for convincing the IRS that you are not trying to evade tax. If you don’t have 3 then you are most likely in the evasion area.

© 2005 StartRunGrow

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