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Tax Avoidance And Tax Evasion

Tax Avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law.

Tax Evasion is the general term for efforts to not pay taxes by illegal means.

Some of those attempting not to pay tax believe that they have discovered interpretations of the law that show that they are not subject to being taxed. These individuals and groups are sometimes called tax protesters. An unsuccessful tax protestor has been attempting openly to evade tax, while a successful one avoids tax.

The Supreme Court has stated that
"The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted."

Legal entities

Personal taxation may be legally avoided by creation of a separate legal entity to which one's property is donated, or income is transferred too. The separate legal entity is often a company, corporation, trust, or foundation. Assets are transferred to the new company or trust so that gains may be realized, or income earned, within this legal entity rather than earned by the original owner. Usually one is only personally taxed on property and earnings that one actually owns; thus, by donating assets to a separate legal entity, personal taxation can be avoided, although corporate taxes may still be applicable. If the legal entity is ever liquidated and the assets transferred back to an individual, then capital gains taxes would apply on all profits.

The company/trust/foundation may also be able to avoid corporate taxation if incorporated in an offshore jurisdiction (see offshore company, offshore trust or private foundation). Although income tax would still be due on any salary or dividend drawn from the legal entity. For a settlor (creator of a trust) to avoid tax there may be restrictions on the type, purpose and beneficiaries of the trust. For example, the settlor of the trust may not be allowed to be a trustee or even a beneficiary and may thus lose control of the assets transferred and/or may be unable to benefit from them.

Tax evasion

By contrast tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions).

Control of evasion

Level of evasion depends on a number of factors, one of them being fiscal equation. People's tendency to evade income tax declines when the return for due payment of taxes is not obvious. Evasion also depends on the efficiency of the tax administration. Corruption by the tax officials often render control of evasion difficult. Tax administrations resort to various means for plugging in scope of evasion and increasing the level of enforcement. These include, among others, privatization of tax enforcement, tax farming, and other means to keep evasion down.

Level of evasion and punishment

Tax evasion is a crime in almost all developed countries and subjects the guilty party to fines and/or imprisonment. In China the punishment can be as severe as the death penalty. It is often considered that extent of evasion depends on the severity of punishment for evasion. Normally, the higher the evaded amount, the higher the degree of punishment.

Tax farming

Tax farming is an old means of collection of revenue when it is difficult to determine the leviable amount of taxes with certainty. Government leases out the collection system to a private entity for a fixed amount or percentage, and who then collects the revenue and shoulders the risk of attempts at evasion by the tax-payers.

Tax protesters and tax resistance

Some tax evaders believe that they have uncovered new interpretations of the law that show that they are not subject to being taxed (not liable). These individuals and groups are sometimes called tax protesters. Many protesters continue posing the same arguments that the Federal courts have rejected time and time again, ruling the arguments to be legally frivolous. Tax resistance is the refusal to pay a tax for conscientious reasons (because the resister does not want to support the government or some of its activities). They typically do not take the position that the tax laws are themselves illegal or do not apply to them (as tax protesters do) and they are more concerned with not paying for what they oppose than they are motivated by the desire to keep more of their money (as tax evaders typically are).

Tax shelters

Tax shelters are investments that allow, and purport to allow, a reduction in one's income tax liability. Although things such as home ownership, pension plans, and Individual Retirement Accounts can be broadly considered "tax shelters", insofar as funds in them are not taxed, provided that they are held within the Registered account for the required amount of time, the term "tax shelter" was originally used to describe primarily certain investments made in the form of limited partnerships, that were in a restricted account of access.

Tax evasion typically involves deliberately ignoring a specific part of the law. For example, those participating in tax evasion may under-report taxable receipts or claim expenses that are non-deductible or overstated. They might also attempt to evade taxes by wilfully refusing to comply with legislated reporting requirements.
Tax evasion, unlike tax avoidance, has criminal consequences. Tax evaders face prosecution in criminal court.

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