Tax evasion may seem tempting for those who feel that they are being taxed to death, but it is not the best solution for tax problems. Tax evasion is not only illegal and highly prosecuted, it saps piece of mind for the perpetrator. With tax increases seeming ever more probable, many are looking for a way out of a big tax bill. Tax evasion is not the answer.
A man came to me several years ago who was a shadow of what he could be. He had been evading taxes for five years and he no longer had any piece of mind. He feared what was to come and had no desire to get ahead for fear he would lose everything. I was able to negotiate a settlement between him and the IRS.
A few weeks later he was back in the office to thank me. He told me he was sleeping soundly for the first time in years and that he felt like he could afford to work and not lose everything. I have seen it first hand; skipping out on your tax obligation is not a good solution.
If is Too Good to Be True it is Probably Tax Evasion
So how can you tell if it is tax evasion? The IRS has a statement on its website which reads “If it sounds too good to be true, it probably is!” It is so easy for one to become a victim to a tax scheme that offers instant wealth or exempts you from your obligation to pay taxes.
Last week I was teaching a class on tax shams. I mentioned how Checkbook IRAs are on the IRS dirty dozen. A woman in the class, who had a Checkbook IRA, loved the tax savings of her tax evasion and was unwilling to give it up. She did not realize that a tax scheme could cost her the whole IRA, or her life saving and would result in prosecution and perhaps her imprisonment.
Unrealistic Reasons Given for Tax Evasion
- Taxes are voluntary and I don’t choose to pay them.
- Taxes are a taken by the government and not legal under the constitution.
- I don’t live in Washington DC
- I have a small business and don’t owe taxes.
- I am not a “native” American
Try Tax Avoidance Not Tax Evasion
While tax evasion is not a reasonable way to save on taxes, tax avoidance is. Tax avoidance involves using legal deductions to lessen the tax bite. Judge Learned Hand ruled in 1947 that, “there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible.” Tax avoidance involves making those arrangements.
There are many ways to legally avoid taxes and save on your tax bill. Most of them require a good knowledge of the tax code and record keeping. For instance, charitable deductions are all tax deductible, but many people forget to keep records of the donations, or take the time to assign a value to used goods donated to charities. If records aren’t kept, good opportunities for deductions are missed.
One rule of thumb that may help analyze tax evasion is that you always pay taxes on money earned at some level in the transaction. To put it simply, if you make money you pay tax on it. The point of the article is that you can save money on your taxes, just be certain you do it legally.