![]() As discussed below, it is the substance, not the form, of the transaction that determines its taxability. For example, if payments by a corporation to its stockholders are in fact dividends, calling them "interest" or otherwise attempting to disguise the payments as interest will not entitle the corporation to an interest deduction. ![]() Engaging in a "sham transaction." You can't reduce or avoid income tax liability simply by labeling a transaction as something it is not.For example, improperly allocating income to a related taxpayer who is in a lower tax bracket, such as where a corporation makes distributions to the controlling shareholder's children, is likely to be considered tax fraud. Hiding or transferring assets or income. This type of fraud can take a variety of forms, from simple concealment of funds in a bank account to improper allocations between taxpayers.Proper record-keeping will go a long way in preventing a finding of tax fraud. Claiming personal expenses as business expenses. This is an easy trap to fall into because often assets, such as a car or a computer, will have both business and personal use.The IRS is always vigilant when it comes to inflated deductions from pass-through entities. It can also include paying your children or spouse for work that they did not perform. These range from claiming unsubstantiated charitable deductions to overstating travel expenses. Claiming false or overstated deductions on a return.Keeping two sets of books and making false entries in books and records. Engaging in accounting irregularities, such as a business's failure to keep adequate records, or a discrepancy between amounts reported on a corporation's return and amounts reported on its financial statements, generally demonstrates fraudulent intent.Examples include a business owner's failure to report a portion of the day's receipts or a landlord failing to report rent payments. Deliberately under-reporting or omitting income. This is self-explanatory: concealing income is fraudulent.Here are some of the most common criminal activities in violations of the tax law: Why? Because a business owner has more options to avoid tax, both legally and illegals. ![]() How do you know when shrewd planning-tax avoidance-goes too far and crosses the line to become illegal tax evasion? Often the distinction turns upon whether actions were taken with fraudulent intent.īusiness owners often find themselves subject to more scrutiny than wage-earners with a similar level of income. Tax evasion, on the other hand, is an attempt to reduce your tax liability by deceit, subterfuge, or concealment. Tax avoidance lowers your tax bill by structuring your transactions so that you reap the largest tax benefits. Tax avoidance is completely legal-and extremely wise. Tax planning evaluates various tax options to determine how to conduct business and personal transactions in order to reduce or eliminate your tax liability.Īlthough they sound similar "tax avoidance" and "tax evasion" are radically different. Individuals and business owners often have more than one way to complete a taxable transaction.
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