So, let’s get this straight: what exactly is tax dodging?
Concealing money or other government assets to avoid paying taxes is unlawful and is known as tax evasion. Repercussions for dodging taxes include jail time and monetary fines.
Can you explain tax evasion to me?
Tax avoidance is a lawful strategy for minimizing taxable income or tax liability. Standard techniques include investing in tax-advantaged accounts like IRAs and 401(k)s and claiming legitimate tax deductions and credits.
Tax Avoidance Examples
Deductions, credits, and changes to your taxable income are available thanks to federal and state tax rules. In addition, some standard methods of evading taxation are outlined below.
Boost Your Retirement Savings: Saving for retirement is one of the best ways to reduce your taxable income. If available, an employer-provided plan would be worth looking into. These deductions are often taken out of your paycheck before taxes are calculated. This shouldn’t be an issue if your company doesn’t provide a plan. Instead, you may form an Individual Retirement Account (IRA) and deduct contributions up to the IRA’s annual maximum from your taxable income.
One kind of tax fraud is deceiving your accountant.
Defying your CPA’s audit is relatively simple, as you may have seen in the recent Manafort case. The CPA will give you a questionnaire or a binder to fill out if you have any international income or foreign accounts. And the response is a negative one from you. This is the case even if you have any abroad holdings, income, or assets (presuming you speak English and understand the questionnaire).
The purpose of your tax preparer is to assist you (or at least they should be). However, we have worked with several high-profile customers (and non-high-profile clients) who have lied to their CPA (the person they are paying to do their taxes appropriately) and said “no” to queries about overseas accounts, assets, or investments totaling several million dollars. It’s important to remember that even if your CPA signs the tax return with you, they have no vested interest in seeing you get in trouble if you mislead or misrepresent information to them. In addition, the attorney-client privilege does not apply to communications with a certified public accountant.
Putting Money in Someone Else’s Bank Account (s)
What we’re not referring about is giving someone else a portion of your wealth. Instead, suppose you just heard about FBAR and FATCA reporting and have $3 million stashed away in a foreign country. You don’t want the government having access to your financial information, and you don’t want to have to declare your earnings to them.
You do this by putting your money into the overseas account of a stranger so as to avoid the reporting requirements in the United States. Since the funds are now recorded in the name of a foreign individual who is under no legal obligation to disclose their ownership, the money should be secure, right?
No, particularly now that FATCA is being strictly enforced. If the foreign bank already knows you are a US citizen or resident, it may have reported your account closure to the IRS. Also, the foreign bank might report the transfer to the Internal Revenue Service.
After that, if the IRS calls you in for an audit, you’ll be subjected to what’s known as a “reverse eggshell audit,” during which any discrepancies or omissions on your part might result in a criminal investigation by an IRS Special Agent.
Tax avoidance strategies including “structuring” and “smurfing”
Structuring is an odd crime since there may be a completely legitimate justification for it in certain cases. For example, to avoid the IRS discovering your financial dealings, you may “structure” them by making fewer deposits, withdrawals, and transfers than would normally be necessary (in other words, below the threshold at which banks are required to disclose them).
By artificially inflating the size and value of your accounts (and transfer)s to avoid detection, you are committing a crime that the IRS has been cracking down on more aggressively ever since the introduction and enforcement of FATCA. This is because the purpose of structuring is to avoid reporting or disclosure by the IRS.
Faris Khatib, the CEO of Ideal Tax states that “Tax planning done correctly may reduce your tax burden significantly.”
Avoiding taxes needs forethought and preparation. To pay the least amount of tax feasible, almost all tax strategies use one or more of the following methods for structuring transactions:
reducing income subject to taxation and maximizing tax breaks and credits
This includes determining when payments and deductions are made.
The ability to accurately predict future cash flow is crucial. If you want to do any serious tax planning, you’ll need a good idea of your personal and business income in the coming years. Many tax planning tactics that reduce taxes at one income level might increase if income grows in the following years, so it’s important to make income and cost estimates for many years.
If you owe back taxes and need help alleviating your amount owed, do not hesitate to contact a tax expert at Idealtax.com. They are conversant with IRS procedures and may provide more details on possible options.
Incorrect income predictions might turn a “good” tax strategy into a “wrong” one. However, for general company planning reasons, you should already know expected sales revenues, income, and cash flow, so most of the data you’ll need for tax preparation is likely already in your possession. Although estimations are never 100% perfect, the more precise you can be, the more effective your preparation will be.