I was browsing the library a few months ago, looking for some accounting books, when I came across a book entitled Keep Your Hard-Earned Money: Tax-Saving Solutions For The Self-Employed. It was clearly a bit dated, as it boasted about ‘including the 1997 tax law changes’.
Now, if you are looking for a book about aggressive tax-reducing tactics that skirts right on the edge of the legal vs. illegal (and hints past it), then this is your book. How it saves you money is by helping you “convert everyday living expenses into business deductions”. The motto of this book is “When In Doubt, Deduct”. We’re talking vacations, last night’s dinner, everything. I definitely wouldn’t feel comfortable doing some of the stuff in this book. However, I did learn a couple of new legitimate business deductions.
Let’s face it. I’m afraid of getting audited. You’re probably afraid of audited. That’s exactly how the IRS likes it. Why? First of all, due to manpower restraints, only about 1-3% of tax returns get audited. And according to this book, 80% of those audited either resulted in a refund, no extra taxes being paid, or a compromise. A compromise means that the IRS questioned some of your business deductions, but in the end they compromised on the amount due instead of just completely disallowing it. In other words, even if you go too aggressive and get audited, you still have good chance of coming out ahead.
However, instead of taking this as a reason to go nuts with iffy deductions, I think it shows that while the IRS runs on a ‘guilty until proven innocent’ system, it doesn’t automatically find everyone guilty. If you have proper proof, you shouldn’t worry. They are not necessarily evil, but they are also not going to just take your word for it. (Would you, if you were them?) Learn the rules, follow them, keep records, and take that deduction!
There are two terms you should be aware of the differences of: tax avoidance vs. tax evasion.
Tax Avoidance is perfectly legal. The courts have stated clearly that you have no duty to pay more taxes that what is minimally required by law. You have every right to take all legitimate deductions and also to structure your business to minimize taxes.
Tax Evasion is a crime. This involves fraud, misreporting income, or taking deductions that you do not qualify for.
I’m all about the tax avoidance, and I’ve been reading a lot of mind-numbingly boring tax books on the subject.
By Jonathan Ping | Taxes | 7/8/06, 3:18pm