The Fine Line between Tax Evasion and Tax Avoidance

Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.

~ Judge Learned Hand in Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).

Tax resistance has existed throughout history – it has inspired revolutions and caused the downfall of empires.  The more common manifestation of tax resistance is protecting your wealth through tax avoidance,a legal and strategic tax method to maximize your income. 

Tax Avoidance: a legal and strategic tax method

Many individuals and businesses are facing legal and public scrutiny for aggressive tax practices. Although many aggressive tax planning practices are legitimate, the government is working hard to close many tax loopholes and it is important to consult with a lawyer experienced in federal tax evasion law before embarking on any new tax-saving ventures.  

Tax avoidance entails the utilization of legitimate, IRS-approved methods to minimize your tax debt, such as:

·         Applying all legitimate deductions

·         Sheltering income through employee retirement plans

·         Use of overseas tax havens legally

Legitimate tax avoidance vehicles and arrangements come under fire when they are used not as intended or anticipated, obscuring the fine line between legitimate tax avoidance and the exploitation, abuse and outright violation of U.S. tax laws.  For example, Caterpillar Inc., a U.S. manufacturer of construction equipment, is currently the subject of a Senate investigation on multinational corporations who have been accused of hiding global profits from U.S. taxation – the company has apparently shifted billions of dollars in profits to Switzerland to evade $2.4 billion in taxes. Such practices run the risk of crossing the line into tax evasion and fraud.

Tax Evasion or Fraud: a federal crime with serious consequences

Tax evasion pushes the idea of tax avoidance across legally permissible boundaries. This crime involves a purposeful attempt to evade an assessment or payment of taxes. Typical violations leading to tax evasion or fraud include:

·         Failure to report income from cash receipts, barter or offshore accounts

·         Underreporting income

·         Misrepresenting income

·         Inflating deductions

·         Taking unsubstantiated deductions, such as charitable contributions not made

The IRS has identified small businesses and sole proprietors as the largest group committing tax fraud, particularly since it is difficult and cost prohibitive for the IRS to identify skimming practices and the failure to report income. Tax evasion is a felony, punishable by up to 5 years in prison or fines up to $100,000 ($500,000 if a corporation is the culprit).  Civil tax fraud penalties may also be imposed.
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