- Recall from our discussion
of basic tax planning strategies
that there are three strategies that people like you
and me employ.
First, we shift income from the current time period
to a point in the future.
Common examples of this are the use of IRAs
and 401(k) investments for retirement.
Our contributions reduce our taxable income now
and we are taxed on the investment
and the earnings on the investment in the future.
Our second strategy is to shift income
from a high tax location be it a state
or a country to a low tax location.
We consider the tax consequences when we decide to relocate
and the third strategy is changing the character
of the income or the rate at which the income is taxed.
We do this by holding investments for more than a year
making them eligible for the lower,
long-term capital gains tax rates.
This is tax planning.
We structure our activities
so that we pay the minimum amount of tax required by law.
Tax planning is different from tax evasion.
Tax evasion occurs when one conceals income
or falsifies deductions in order to pay less tax
than is legally required.
Tax planning is smart.
Tax evasion is a crime.
So, now let me share with you
some common tax evasion schemes
so that you will never fall victim to these schemes
and find yourself on the tax evasion side
of the tax planning line.
One common tax evasion scheme
is refusing to file income tax statements
or refusing to pay income taxes
because of a mistaken belief
that it's illegal for governments
to collect income taxes.
For residents of the United States,
let's go to the U.S. Constitution
to get the definitive word on this issue.
From the 16th Amendment which was ratified in 1913,
we read the following.
The Congress shall have power to lay and collect taxes
on incomes from whatever source derived.
So, it is incorrect to think
that the U.S. Federal Government
does not have the authority to tax income.
It's right there in the Constitution.
A second common tax evasion scheme
is to understate business income
sometimes by hiding cash collected.
The most common place for this to happen
is in small businesses.
An unethical small business operator
asks a customer for payment in cash
and then doesn't provide a written receipt.
This money is erroneously deemed to be non-taxable
because it's non-traceable.
If it's eventually traced through bank records
which the IRS can access, then it is taxed
along with penalties and potential criminal charges,
for example, in 1931 Al Capone,
an infamous US gangster was convicted
of income tax evasion for failing
to report the income from his illegal activities.
Now, the government was never able to convict Capone
of the illegal activities themselves.
Remember, income is taxable whether it's traceable or not.
A third common tax evasion scheme
is hiding income or investments offshore.
In the United States, citizens are taxed
on their worldwide income,
so if a US citizen earns income in China, for example,
that citizen, no matter where she or he lives
must pay US income tax on that income.
Note, the US citizen receives a tax credit
for any income taxes paid to the foreign government.
Now, most countries do not tax their citizens
on worldwide income
but the United States does.
Now, the source of the evasion temptation
is that foreign companies and banks
usually do not have any obligation
to report to governments around the world
the amounts that they pay to you.
Thus the wrong thinking goes
that if the foreign company
doesn't notify your government about the income,
then that income is not taxable.
Again, income earned by a US citizen in a foreign country
is taxable in the United States
whether the foreign employer reports it
to the United States government or not.
Please note that paying income taxes is not a game
of I will pay it if they can find it,
the law requires proper reporting of income.