Hello, I need help with the response to my peers: Topic: Tax Avoidance Versus Tax Evasion
Peer 1:
Tax evasion refers to the act of taxpayers concealing portions or all their income through strategies such as altering financial information, falsifying revenue documents, or keeping relevant information from their tax advisor. This action is considered illegal.
Tax avoidance is when taxpayers lower the amount of taxes they owe by taking advantage of eligible deductions and credits that are permitted by federal, state, and local regulations. This action is deemed legal.
An example of falsely reporting information to reduce taxes is an article about an Alaska Businesswoman that allegedly evaded more than 1.5 million in federal income taxes. She allegedly maintained two sets of books and records relating to her business’s income and expenses. One of which accurately captured the income and expenses, and one that understated the company’s income. She allegedly provided false records to her accountant and did not report to the IRS more than 3.2 million in business income. (Office of Public Affairs). The actions taken improperly avoided paying taxes. The taxpayer could have given her accountant the accurate books and records of the business’s income and expenses to avoid being accused of tax evasion. Some proper ways to avoid paying taxes is taking advantage of the liability-reducing tax credit which allows companies to deduct a portion of all money spent on research and development from their tax obligations, accelerated depreciation allows corporations to deduct a greater percentage of an asset’s value in the early years of the investment, which let’s the business take advantage of the tax deduction sooner.
Peer 2:
As part of my job, I am required to routinely research the Internal Revenue Manual. In fact, it provides the legal basis for every technical action I engage in. Chapter 25 is one of my go-to’s, although the subsection on fraud admittedly doesn’t come up all the often in my line of work; that’s going to fall more into the purview of revenue agents’ and criminal investigators’ job descriptions, for the most part. However, I have taken a proactive interest in learning about this subject due to my long-term goals. Additionally, I recently took a personal finance class at the community college that I transferred from which also discussed this topic. In short, tax avoidance is a strategy by which taxpayers seek to minimize the amount of tax they are required to pay, while operating within the confines of the law. Tax avoidance involves careful planning in order to take advantage of things such as deductions and credits which the taxpayer is legally entitled to claim, as well as accurately and honestly reporting income. On the other hand, tax evasion is an inherently unlawful act wherein an individual or business intentionally defrauds the government, such as by failing to report income, attempting to deduct expenses or claim credits to which they are not entitled, failing to withhold payroll taxes, and more. (Findlaw, 2023) Criminal violations of the Internal Revenue Code are investigated by IRS Criminal Investigations, sometimes with assistance from certain civil IRS units such as Small Business/Self-Employed Division’s Special Enforcement Program. (Internal Revenue Service) A key distinction to be made is that tax evasion is, by definition, an intentional act. One cannot “accidentally” commit tax evasion. While you can certainly be held accountable for making a mistake which results in the IRS (or a state tax agency) being shorted, you won’t be facing criminal charges unless you compound the mistake by, say, destroying evidence or threatening the IRS employee working your case. For this assignment, I looked through IRS CI’s news archive and found a pretty interesting case. For five quarters in 2014 and 2015, Shane Brightpath Mike, who was president and CEO of a Northern California based home care business, withheld payroll taxes from his employees but failed to make payments to the IRS. Additionally, he filed falsified individual returns for those same years, claiming credit for withholding from those payroll taxes despite not actually paying them. Altogether, his acts of tax evasion cost the government nearly $1.2 million. Given that payroll taxes are used to fund employees’ Social Security and Medicare, payroll tax fraud is by no means a victimless crime. Mr. Mike pleaded guilty to payroll tax fraud on April 30 and is facing up to five years in federal prison when he is sentenced on September 24. This case is interesting because, as the story notes, Mike could have deducted part of the payroll tax from his own returns, thereby lowering his taxable income and legally reducing the amount of tax he was required to pay. Instead, he chose to defraud his employees and the Internal Revenue Service, and is going to pay more than he would have saved if his plan succeeded. (Internal Revenue Service, 2024)
