Which One is Legal? (The IRS Said So)
Everyone knows you’re supposed to pay your taxes. If you don’t, that’s illegal. It’s called tax evasion.
But what about avoiding taxes?
Believe it or not, it’s not quite the same thing.
The IRS defines tax avoidance as “an action taken to less tax liability and maximize after-tax income.” This is perfectly legal.
Tax evasion is the “failure to pay or a deliberate underpayment of taxes.” It’s what can land you in hot water with the IRS. It could also land you in jail, besides owing taxes, penalties and interest.
Tax Evasion Examples
If you fail to report part of your income, that is tax evasion. You need to report all income from every source, even from illegal activities. That’s right, drug dealers are supposed to report that revenue. And bank robbers and purse snatchers as well.
Worry about the police? These people should worry about the IRS! Think Al Capone!
Another way people try to evade paying taxes is by not filing. You owe the tax whether you file or not, and that can catch up with you. With penalties and interest added on.
Recently a new client told me she had over $5K in penalties added on to a $10 tax bill. Seriously, it happens!
Tax Avoidance Examples
It may seem counterintuitive, but tax avoidance is perfectly ok in the eyes of the IRS.
Again, tax avoidance is actions that you take to lower your tax bill… via legal, legitimate means.
Here are a few examples.
If you have children that are dependent on you, you should claim them on your return. Each child is a tax deduction, lowering your income and your tax bill.
Homeowners can deduct the interest they pay on the mortgage loan for their primary home. This reduces the tax bill by reducing their income.
Are you contributing to a qualified retirement plan such as a 401K? Those contributions are deducted from your income. The lower your income, the less tax you pay.
The following is a direct quote from the IRS.
“Many people pay more federal income tax than necessary because they misunderstand tax laws and fail to keep good records.”
Did you get that? The IRS said you may be paying too much tax. Many people are!
A Little Planning can Mean a Lot of Saving
This is where tax professionals come in.
There are nearly 80,000 pages of tax law regulations and case law, etc., it’s hard for the average person to know what they are entitled to.
As well, tax laws change. The new Tax Cuts and Jobs Act of December 2017 has changed standard deductions, among other things. There were also additional changes to that, on February 9 and March 23 as of this writing.
And it’s worth seeing a tax professional now, particularly if you owed money in 2017 to see how 2018 will shape up.
Why?
Because a tax professional can help lower your tax bill in ways you might not be able to take advantage of if you wait until April 2019 to worry about it.
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Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax & Accounting Services as well as the Enrolled Agent and Certified Tax Resolution Specialist for SFS Tax Problem Solutions.
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Now What? I Got A Tax Notice From The IRS. Help! Defining and deconstructing the scary and confusing letters that land in your mailbox. Jeff defines and deconstructs the scary and confusing letters in a fashion that mixes attention to detail with humor and an intricate clarification of what is what in the world of the IRS.
The book is available in paperback and ebook on https://Amazon.com
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For more on SFS Tax & Accounting Services, visit https://sfstaxacct.com/
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738 Colorado Avenue Stuart, FL 34994
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Phone: 772-337-1040
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