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Tax Avoidance vs. Tax Evasion

Tax Avoidance vs. Tax Evasion

Every once in a while, but not very often, our firm is approached by individuals or businesses who would like our help to hide some of their activities from the IRS.  In their mind they vision an accountant to be able to help them avoid taxes at any cost, no matter what method it takes. 

A couple of years ago we met with a new client who had a terrible experience with his previous tax preparer.  This tax preparer “helped” his clients and attempted to keep them happy by ensuring that they would receive nice refunds by reporting generous but fictitious deductions on their returns.   The IRS saw a pattern with this tax preparer’s firm and his whole client base was subjected to IRS audits.   Our new client, who said he had no idea this tax preparer had put fictitious deductions on his return, ended up owing the IRS taxes and penalties of several thousand dollars.  It ended up being a terrible and costly experience.  I don’t know if this tax preparer has spent any time in jail as of yet, but I do know that he has been permanently barred by the Feds from preparing any future tax returns.

“The difference between tax avoidance and tax evasion is the thickness of a prison wall” (quote by Denis Healey, British politician).

Tax evasion may get you in prison and is heavily penalized with fines, but tax avoidance is legal.  A good CPA or tax preparer should give his or her clients sound advice and methods to reduce taxes while complying with the tax law.  A CPA’s duty is also to help keep his or her clients out of trouble with the IRS.  Tax avoidance is very different from tax evasion as in the following examples. 

Tax Avoidance: 

  • Contribute to your IRA or 401(K) plan
  • Make charitable donations
  • Set up a home office (by following IRS guidelines)
  • Purchase new equipment (for business owners)

Tax Evasion:

  • Not reporting all income
  • Claiming fictitious expenses
  • Inflating donations
  • Under-reporting revenue, sales tax collected, and payroll (for businesses)

Talk to your CPA about ways to legally reduce your taxes through tax planning.  We encourage our clients to call us anytime throughout the year when they have any questions or wonder if a change in their current situation may affect their taxes.  When fall comes around, we contact our clients to see if they would like to have help with tax planning to avoid any bad surprises at tax time after year-end.  Because, after year-end there is very little that can be done to reduce your tax liability or increase your refund.

Our recommendation is for you to look for a good and honest CPA who’ll give you good tax advice and do his or her best to keep you out of trouble with the IRS. 

As a side note:  I once asked my dear mother-in-law, who worked many years in her husband’s CPA office, if they ever experienced people asking them to tweak the tax law.  She replied: “The answer to these people are that we have to report it the way we understand it should be reported according to the tax law.  If they don’t like it, they are free to go somewhere else.”  I think that is good and sound advice from a wise woman!

 

Kristin Allen

Vice President of Allen & Company, PC, Accountant, and Wife of a CPA

kallen@allenandcompanypc.com

www.allenandcompanypc.com

(770) 428-6229

 

Allen & Company, PC  - a CPA firm serving Kennesaw, Marietta, Acworth, Woodstock and north Atlanta.  Providing accounting, financial statement audit, taxation, and advisory services for individuals and businesses.  Extensive experience working with quick service restaurants and other franchised businesses.