What is tax avoidance? It is the employment of lawful tactics to legally avoid or lower taxes. This includes various estate planning strategies, legitimate charitable deductions and charitable trusts or foundations, accelerating tax deductions, deferring income, and creating legal entities, to name a few.
What is tax evasion? It is any plan to reduce taxes through illegal means. The IRS often refers to them as abusive tax shelters. There is a long history of hucksters and grifters who promote such illegal strategies promising unrealistic tax savings and reaping a tidy profit in doing so. However, when the IRS comes knocking with taxes, penalties, interest, liens and levies, these con men are no where to be found. In some cases, fortunately, it is because the IRS has located and prosecuted them and they are in prison.
In earlier times, these illegal schemes, which included “pure equity trusts”, “constitutional trusts” and other similar scams, were promoted either in books, newsletters or traveling road shows presenting seminars in hotels and the like.
Today, they are often promoted on the internet and involve the sale of certain asset protection kits which promise, among other things, unrealistic and illegal tax savings
Another recent tax scam is the micro-captive structure in which the fraudsters persuade owners of closely held entities to participate in shady insurance arrangements. The premium deduction promised as a tax deduction often fails to pass the standards of the IRS resulting in interest and penalties.
Each year the IRS publishes its “Dirty Dozen” list of tax scams on the IRS website. (www.irs.gov).
How can you avoid the tax evasion scams? One way is to follow the old rule that if it sounds too good to be true, it probably is.
Another way is to avoid taking tax advice from strangers, whether they are putting on a seminar or webinar or have published a book or website promoting strategies that claim drastic tax deductions.
Finally, turn to your long time trusted advisors such as your attorney, accountant or financial advisor who works for a legitimate company for a second opinion on tax saving pitches you have received.
There is nothing wrong with looking to save on taxes, but you must be careful in doing so as the financial consequences can be severe and could include imprisonment.