tips

Tax Evasion vs. Tax Avoidance

tax evasion

In the world of finances, tax evasion and tax avoidance are two terms that often get confused and yet have completely different meanings. 

Tax Evasion

Simply put, the term tax evasion means not paying the taxes that you owe. Penalties for this type of infraction can range anywhere from fines to jail time depending on intent. Intentionally foregoing the payment of your taxes will most likely result in hefty punishment.

Don’t believe us? Go read about actor Wesley Snipes' recent 3 year stint in prison after opting out of paying his taxes. 

Important things to remember when trying  to “Avoid” Tax Evasion

  • Declare your independent contractor’s income
  • Don’t inflate business expenses
  • Report income earned in other countries
  • Don’t declare personal expenses as business expenses

Tax Avoidance

Tax avoidance on the other hand, is when you arrange your income in a manner that legally allows you to pay the lowest amount of taxes. And yes, this is legal. In fact, there’s an entire industry built around this concept—it’s called tax consultancy—something we love helping clients with here at Bookly

Speaking on the constitutionality of the matter, Judge Learned Hand said:

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands. 

In most cases, tax avoidance is more applicable to higher income earners. There are less ways for low income individuals to avoid payment of taxes. This fact has been at the helm of much political debate—something we’ll leave to the pundits. 

Methods of Tax Avoidance

  • Deferring income (401k)
  • Getting income through Capital Gains
  • Using the primary residence capital gain exclusion to its full effect

Beware! Tax-Related Scams Small Business Owners Should Watch Out For

hackers

The holiday season isn’t only the most wonderful time of the year for you, it can be the time when scammers and spammers come out to play. 

I recently read an article from TaxGirl Kelly Erb on a new phone scam targeting U.S. taxpayers. This detailed scam involves a series of phone calls purportedly from the IRS telling the taxpayer that his identity has been stolen and asking for identifying details to aid in the investigation. Of course, the scammers then use that identifying information… to steal the unwitting taxpayer’s identity. 

This new version on the same old scam got me thinking about other financial frauds I’ve seen over my years writing about small business and taxes. 


Why Financial Scams Work 

According to a 2013 survey by the FINRA Investor Education Foundation, 8 in 10 survey respondents were approached about some kind of financial fraud. And 11% of respondents actually lost money to fraud. 

Most of the time, fraud occurs because of totally understandable ignorance. If you’ve never had to deal with the IRS in your entire life, how would you know that they normally contact you with important information via U.S. mail and not a phone call? Or if you’re fairly new to email, that message from your bank asking you to click a link and give them your private details could be very tantalizing. 

Fraudsters also play on fear. There’s a reason that they use email subject lines like “Your identify has been stolen!” They want to get your guard down and panic you so that you throw your good sense out the window as they lure you farther into the scam. 

Sadly, scammers also feed on desperation. In a bad economy, a good person struggling financially can be tempted by offers of money that seem too good to be true and that they normally wouldn’t look twice at if not in a place of financial need. 

Be suspicious of easy money and anyone who asks for your identifying information out of the blue and you’ll be inoculated from most fraudsters. 


Common Scams Small Business Owners Face 

Email Phishing Scams – Beware of emails that appear to be from your bank or the IRS asking for personal information. Most times, these emails will tell you to click on a link and enter identifying data, like your social security number. Of course, the link usually goes to a site set up by the fraudster, who then uses it to collect the data he can later use to steal your identity. If you ever receive a communication from the IRS or a financial institution through email, don’t click any links. Instead contact the purported sender yourself to find out if the communication is legitimate. 

Tax Preparer Fraud – This scam occurs when a less-than-professional tax prepare claims she can get you a huge tax refund. Often, you’ll notice that she receives a percentage of your return, so, of course, it’s in this fraudsters best interest to take every outrageous deduction and tax break she can find. She’ll also often fail to give you a copy of the return, or insist that the refund be deposited into her bank account first. Make sure your tax preparer is a professional and beware of too-good-to-be-true tax refunds. 

For more info about these and other common scams check out the IRS’s common scams page or their Dirty Dozen Tax Scams list for 2014. 

 

Audited? Don't Panic! Here's How to Handle it.

startup hub

Nothing strikes fear into the hearts of small business owners quite like the a-word. Whether it’s the IRS or state taxing authorities, having someone tell you they want to audit your records is a fraught time even for the most organized business owner.

You think you filed your tax returns correctly, but what if you made a mistake? Could you have to pay a huge penalty? Could you even go to jail? 

Unfortunately, small business owners are a bit more likely to be audited than the general public because they self-report info on the Schedule C. It’s tempting to panic when you see the word “audit” but don’t. Just like with many big, bad boogeymen, this one isn’t as scary as it seems once it knocks on your door. 

A FEW TIPS TO HELP YOU HANDLE YOUR AUDIT WITH FINESSE... 

READ THE LETTER CAREFULLY

Think of an auditor as a man in a black suit and dark sunglasses whisking you away to a non-descript office complex to go over your entire life? Believe me! It isn’t as bad as all that. 

In fact, the vast majority of audits are carried out via the U.S. mail. In fact, the IRS will never call or email you, so if someone claiming to be from the agency contacts you in any form other than a letter, be wary. 

If you do get a letter, keep in mind that most times, the IRS is only auditing a portion of your tax return. That said, read the letter carefully. In most cases, the IRS simply wants clarification on one part of your tax return. Once you have answered their request they will let you know in writing what they’ve decided, and you even have a chance to appeal. See, that wasn’t so scary? 

Gather Documentation 

If the IRS or your state’s taxing authority comes calling, be prepared to back up your tax claims with documentation. If the audit is mileage related, for example, be prepared to show an auditor your mileage log. 

Do be careful about what you show an auditor. Only give them enough information to answer the question they asked. If you offer up more information, such as your whole “Taxes 2012” file, they are allowed to expand the scope of the audit. And nobody needs more trouble!
From there, be sure to send in any requested documentation by the deadline listed on your letter. 

Watch for Red Flags

If you must meet with an auditor, do not meet with him or her at your home. Instead request to meet at a local tax office or even, if you have retained one, your tax attorney’s office. 

Before you meet the auditor, know your Taxpayer’s Bill of Rights. If you feel at any time like the audit is going badly, you can request to pause and consult with an attorney. If the auditor mentions serious crimes, such as “tax fraud” then it’s in your best interest to consult an attorney. Fortunately, when you’re a small business owner simply trying to do the right thing you likely won’t run into such a dire predicament.