As an individual taxpayer, and as a business owner, you will often have the option of completing a taxable transaction by more than one method. The courts strongly back your right to choose the course of action that will result in the lowest legal tax liability. In other words, tax avoidance is entirely proper.

Although tax avoidance planning is legal, tax evasion — the reduction of tax through deceit, subterfuge, or concealment — is not. Frequently, what sets tax evasion apart from tax avoidance is the IRS's finding that there was some fraudulent intent on the part of the taxpayer. The following are four of the areas most commonly focused on by IRS examiners as pointing to possible fraud:

• A failure to report substantial amounts of income, such as a shareholder's failure to report dividends, or a store owner's skimming from the cash register without including it in the daily business receipts.
• A claim for fictitious or improper deductions on a return, such as a sales representative's substantial overstatement of travel expenses, or a taxpayer's claim of a large deduction for charitable contributions when no verification exists.
• 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.
• Improper allocation of 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.

How a tax plan works. There are countless tax planning strategies available, particularly if you own a small business. Some are aimed at your individual tax situation, some at the business itself. But regardless of how simple or how complex a tax strategy is, it will be based on structuring the transaction to accomplish one or more of these often overlapping goals:

• reducing the amount of taxable income
• reducing your tax rate
• controlling the time when the tax must be paid
• claiming any available tax credits
• controlling the effects of the Alternative Minimum Tax
• avoiding the most common tax planning mistakes

In order to plan effectively, you'll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the "right" tax plan made "wrong" by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.

For a more detailed discussion of this topic, please consult Getting Started.

Tax Guide 2008

What To Expect if You Are Audited
Hopefully, this will not be an issue for you, but you should have some awareness of the IRS audit procedures. The IRS has several different levels of audits. If questions arise about your math, items seem to be omitted from your return, or your figures don't match those on your W-2s, 1099s, or 1098s, the IRS may simply request a correction or explanation by mail.   To explore this topic further, take a look at  What To Expect if You Are Audited.

Penalties for Underpayment or Late Returns
What happens if you don't file a tax return or pay taxes that you owe by their due date? Generally, in this situation the IRS will send you a notice hitting you with interest and penalties.   For more details, please review Penalties for Underpayment or Late Returns.

Keeping Good Records
Preparing to meet your annual tax obligations is a year-round process. For example, everyone who pays taxes is required to keep accurate, permanent books and records so they can determine the various types of income, expenses, gains, losses, and other items that affect their income tax liability for the year.   To help get you on the road to better tax organization, please read Keeping Good Records.

Tax News

Safeguarding Records

With the approach of the hurricane season, the IRS is encouraging taxpayers to safeguard their hard-to-replace tax records and financial documents. According to the IRS, a few simple steps can help taxpayers and businesses protect financial and tax records in case of hurricanes and other disasters.   For more on this important issue, please read IRS Encourages Taxpayers to Safeguard Records from Hurricane Damage.

New Tax Laws Enacted

After months of political wrangling, Congress has passed a small business tax incentives bill coupled with an increase in the federal minimum wage. The Small Business and Work Opportunity Tax Act of 2007 (2007 Small Business Tax Act), signed into law on May 25, 2007, is part of a much larger and more controversial bill, H.R. 2206, U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007. The 2007 Small Business Tax Act targets nearly $5 billion in tax incentives, principally to small businesses. It also includes tax incentives to help taxpayers recovering from Hurricane Katrina, as well as an important package of S corporation reforms. However, revenue raising provisions totaling nearly $5 billion mean more taxes for certain taxpayers, especially familes with children.   To learn more about this recent development, please read New Tax Laws Provide More Pain than Pleasure.

Planning for Next Tax Season

Mercifully (or unmercifully), this year's April 17 tax deadline has come and gone. Unfortunately, the same cannot be said for our continuing obligations as taxpayers. With another tax filing season less than a year away and while your psychological scars are still fresh, please consider these lingering tax-related issues.   For more on this story, please look at Prepare Now for Next Year's Tax Season.


Tax News Archive

For more news stories and features on federal, state and payroll tax issues and how they may affect you, read the listing of articles in the archive.

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