![\"tax](\"https:\/\/content-cdn.one.lumenlearning.com\/wp-content\/uploads\/sites\/15\/2023\/02\/07193401\/pexels-nataliya-vaitkevich-6863244-1-300x200.jpg\")
Figure 1. Tax avoidance is legal while tax evasion is illegal.[\/caption]\r\n\r\n Figure 1. Tax avoidance is legal while tax evasion is illegal.[\/caption]\r\n\r\nTax evasion is a crime while tax avoidance is accomplished by using legal methods to lower your tax bill. Common criminal activities that violate tax law include underreporting income, making false entries in financial records, and categorizing personal expenses as business expenses.[footnote]Wolters Kluwer. \u201cTax Avoidance Is Legal; Tax Evasion Is Criminal,\u201d April 21, 2023. https:\/\/www.wolterskluwer.com\/en\/expert-insights\/tax-avoidance-is-legal-tax-evasion-is-criminal[\/footnote] The penalties for tax evasion are severe and can include repayment of the unpaid taxes with added interest plus prison time. For example, attorney Mark Carbutti failed to pay taxes on income from his legal practice and rental income and was sentenced to 15 months in prison, two year of supervised release, and payment of $750,180 in unpaid taxes, interest, and penalties.[footnote]Internal Revenue Service. \u201cWallingford Attorney Sentenced to Prison for Tax Evasion.\u201d Accessed May 24, 2023. https:\/\/www.irs.gov\/compliance\/criminal-investigation\/wallingford-attorney-sentenced-to-prison-for-tax-evasion[\/footnote]<\/p>\r\n
Legal tax avoidance strategies typically require skillful planning that minimizes taxable income; maximizes tax credits and deductions; and controls the timing of when income comes in and when deductions are taken. This type of planning often requires predicting personal and business income over a period of years.[footnote]\u201cTax Avoidance Is Legal; Tax Evasion Is Criminal.\u201d[\/footnote] Individuals and businesses who have multiple streams of income, different types of investments, or other complexities in their finances will often turn to a Certified Public Accountant (CPA) for advice. CPAs are one kind of accounting professional who have met specific educational requirements, passed a rigorous exam, and worked under the supervision of a more experienced CPA as part of their certification process.<\/p>\r\n
According to CPA Deborah K. Rood, if you hear of a tax planning strategy that sounds too good to be true, you should be cautious. Rood highlights some signs that raise red flags:[footnote]Rood, Deborah. \u201cAvoiding Fallout from Aggressive Tax Strategies.\u201d Journal of Accountancy, June 1, 2021. https:\/\/www.journalofaccountancy.com\/issues\/2021\/jun\/aggressive-tax-strategies-cpa-firms-avoid-fallout.html[\/footnote]<\/p>\r\n
Former IRS Commissioner Danny Werfel believes that, \"[m]ost tax professionals offer excellent advice and can really help people navigate complex tax issues. But we continue to see instances where taxpayers are 'ghosted' by unscrupulous tax preparers with bad advice who quickly disappear.\"[footnote]Waggoner, Martha. \u201cDirty (Half) Dozen: Watch for These Red Flags When Choosing a Tax Preparer.\u201d Journal of Accountancy, March 27, 2023. https:\/\/www.journalofaccountancy.com\/news\/2023\/mar\/dirty-half-dozen-watch-for-these-red-flags-when-choosing-a-tax-preparer.html[\/footnote] The IRS encourages taxpayers to be educated about different kinds of credentials and qualifications<\/a> that professionals such as enrolled agents, CPAs, and attorneys have before using their services in tax preparation. The IRS also publicizes an annual list of the Dirty Dozen scams<\/a> that taxpayers may encounter.<\/p>","rendered":" Tax evasion is a crime while tax avoidance is accomplished by using legal methods to lower your tax bill. Common criminal activities that violate tax law include underreporting income, making false entries in financial records, and categorizing personal expenses as business expenses.[1]<\/sup><\/a> The penalties for tax evasion are severe and can include repayment of the unpaid taxes with added interest plus prison time. For example, attorney Mark Carbutti failed to pay taxes on income from his legal practice and rental income and was sentenced to 15 months in prison, two year of supervised release, and payment of $750,180 in unpaid taxes, interest, and penalties.[2]<\/sup><\/a><\/p>\n Legal tax avoidance strategies typically require skillful planning that minimizes taxable income; maximizes tax credits and deductions; and controls the timing of when income comes in and when deductions are taken. This type of planning often requires predicting personal and business income over a period of years.[3]<\/sup><\/a> Individuals and businesses who have multiple streams of income, different types of investments, or other complexities in their finances will often turn to a Certified Public Accountant (CPA) for advice. CPAs are one kind of accounting professional who have met specific educational requirements, passed a rigorous exam, and worked under the supervision of a more experienced CPA as part of their certification process.<\/p>\n According to CPA Deborah K. Rood, if you hear of a tax planning strategy that sounds too good to be true, you should be cautious. Rood highlights some signs that raise red flags:[4]<\/sup><\/a><\/p>\n Former IRS Commissioner Danny Werfel believes that, “[m]ost tax professionals offer excellent advice and can really help people navigate complex tax issues. But we continue to see instances where taxpayers are ‘ghosted’ by unscrupulous tax preparers with bad advice who quickly disappear.”[5]<\/sup><\/a> The IRS encourages taxpayers to be educated about different kinds of credentials and qualifications<\/a> that professionals such as enrolled agents, CPAs, and attorneys have before using their services in tax preparation. The IRS also publicizes an annual list of the Dirty Dozen scams<\/a> that taxpayers may encounter.<\/p>\nWhat is tax avoidance and is it illegal?<\/h2>\n
Cautionary Guidance<\/h3>\n
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