It seems surprising, at times, that many people confuse the terms “tax evasion” and “tax planning.” There is a world of difference between them. One is an illegal activity with potentially serious penalties (tax evasion) and the other an activity government itself, and tax authorities, take for granted (tax planning).
One source of confusion might be the term “tax avoidance.” In the United States, it usually means the same as “tax planning”—taking legal steps to pay the taxes required by law, but not more than you owe. In the United Kingdom, it sometimes implies a “grey area” where an action to minimize taxes is not illegal but somehow not quite ethical. That makes the term a very “loaded” judgment, carrying with it sometimes-political attitudes or social theories that are beside the point for managing your legal tax obligations.
The tax code in both nations is complex, ever-changing, and complicated by the existence of national (or U.S. federal), state, local, and other tax codes. There is no possibility of ascertaining what a given individual or business legitimately is required to pay at tax time without careful records, knowledge of the different tax codes, and some understanding of decisions made by tax authorities and courts that clarify ambiguities in the meaning of the law and regulations.
Tax planning, affirmed as obviously necessary by the U.S. Supreme Court more than a century ago, means bringing to bear that familiarity with tax codes, understanding how an individual or business can take advantage of hundreds of “tax breaks” written into law, and preparing and filing taxes accordingly. Some well-known examples of ways most informed taxpayers reduce the taxes they owe:
- Increase their retirement savings. Most often, you pay into these plans from pre-tax earnings right from your paycheck if it is your employer’s plan. In addition, or instead, you can open an Individual Retirement Account (IRA) and most contributions won’t be taxed.
- Make the most of work deductions. The Internal Revenue Service (IRS) lets you deduct expenses that typically are necessary to do your job. That could be anything from union dues to professional subscriptions.
- Benefit from a home equity loan. A home equity loan is one of the few ways of borrowing where the interest you pay is tax deductible. There is a cap on how much you can deduct, and laws seem to keep changing, so you need advice on what is permitted.
These obviously are just a few perfectly legal ways an individual can reduce taxes. There are many others and for businesses some are different.
The truth is that without some grasp of the how to plan for taxes and file federal and other tax returns an individual almost certainly will pay more tax than the law stipulates—often much more—or stumble into violations of the tax code. Such violations, if they can be shown to the satisfaction of tax authorities to be mistaken, will not result in heavy penalties or a prison term. But the audit of records, and the cross-examination of the taxpayer, never are pleasant experiences.
If the Worst Happens
If you are audited, you should at a minimum provide all requested materials, never lie or conceal anything, and retain qualified tax counsel to advise you. The determination by tax agents as to whether or not you’ve made a mistake or have committed a civil or criminal offense pivots on the concept of “intention.” You failed to abide by the tax code, but was it an honest mistake or tax evasion?
Providing all materials requested and answering all questions by tax agents—even when that may seem to hurt your case—is the best recourse. Again, you will be much more secure in making such decisions if you have the qualified counsel of tax professionals.
TPI Group can answer all your questions, direct you to more information, and offer a free tax-planning consultation. We provide a range of tax, tax advisory, accounting, and financial services to individuals and businesses.