It is not uncommon for the allure of aggressive tax strategies to lead well-intentioned taxpayers astray. For high net-worth individuals and small business owners, the line between legitimate tax savings and illicit tax evasion can sometimes seem blurred. Here are three indicators to help you discern lawful tax planning from potential tax crime.
#1: What are the legal boundaries?
Tax avoidance is the legal use of the tax regime to one’s own advantage, to reduce the amount of tax payable by means that are within the law. Tax evasion, on the other hand, is the illegal evasion of taxes by individuals, corporations, and trusts.
Savvy individuals and business leaders are wise to familiarize themselves with the tax code and stay updated on legislative changes. If a tax strategy directly contravenes the law, it is not just aggressive — it is likely criminal.
Another key red flag: a lack of transparency. Engaging in transactions with complete transparency with tax authorities is a hallmark of legitimate tax planning. Concealment or deceit is generally a sign of fraud. The federal courts have implemented various strategies that are geared towards focusing in on the substance of the tax strategy. Those that are focused only on avoiding taxes and not on a legitimate purpose are unlikely to survive such scrutiny.
#2: What is the tax strategy?
Be wary of tax strategies that are overly complex or too difficult to understand. If the primary purpose of a transaction is to obscure the trail of the income, it is likely not legitimate.
There is no such thing as a risk-free tax strategy, especially one that promises significant returns. If it sounds too good to be true, it probably is.
A sound tax-saving strategy should be able to withstand independent scrutiny. If advisors discourage you from getting a second opinion, question their motives.
#3: What do other professionals say?
It is generally wise to consult with reputable tax professionals who have a track record of ethical practice. They should be willing to explain the strategy and how it complies with the law. Check their credentials.
Discerning between tax savings and tax crime comes down to understanding the law, evaluating the strategies presented, and consulting with ethical professionals. Those who find themselves facing allegations of crossing over the line and into criminal activity are wise to take the accusations seriously as a conviction can come with hefty financial penalties and the threat of imprisonment. The attorneys at Goldburd McCone LLP are experienced with these matters and can review your situation and better ensure your rights are protected.