Every business owner, irrespective of the field, needs to file and pay tax each year. The good news is there are legal strategies to reduce the amount you send to Uncle Sam as taxes.
Some business owners take advantage of these legal tactics to avoid paying taxes altogether on purpose. Knowing the difference between tax evasion and tax avoidance can save you from committing tax fraud and lower your tax bill legally.
What is Tax Avoidance?
Tax avoidance involves using legal means to reduce the entire amount of money you will send to the IRS every year. Examples of such ways are:
Claiming tax deductions
Claiming exemptions like home deduction
Claiming tax credits such as Work Opportunity tax credit
Transferring money into 401(K), IRA or other accounts to delay tax till a later date
The IRS supports and encourages these tax avoidance means as they are legal. It is intended to get considerable savings on money spent on your business for the year. It reduces the entire money you will have to pay as a federal tax every year.
What is Business Tax Evasion?
Tax evasion is a crime – a felony, unlike tax avoidance. This is when people deliberately do not file their returns. With this, they end up not paying the IRS what they should. The following people are guilty of tax evasion:
You intentionally refused to file your return.
You did not give enough information about your business and its income.
You did not report the entire amount, let alone pay it.
You understate your payroll.
You contracted your payroll service to an outsider that did not send over the withholding to Uncle Sam.
You refuse to withhold payroll services like FICA.
You pay your workers in cash in a bid to avoid reporting and paying payroll taxes.
The above and many others are examples of tax evasion, which comes with stiff penalties backed up by law. One could incur fines of, up to $250,000 to $500,000. You will have to pay the court fees for your case or federal prison sentences that run from one to five years. These sentences do not exempt you from paying everything you owe the IRS, as you will have to file and pay your back taxes in full.
The consequence of tax evasion is not worth it. You might ruin your reputation as a business owner, and in extreme cases, you lose the business and the assets. In avoiding legal and financial ruin, be sure to know how to prevent tax evasion.
Using Tax Avoidance to Your Advantage and Avoiding Tax evasion
New business owners might not necessarily be guilty of tax evasion. This could be traced to their unfamiliarity with federal tax laws. They might not know when and how to file their taxes. They could also be confused about the sort of income they can legally claim.
What everyone needs to know is that every year, the federal tax law changes. As a result, even the most informed business owner might find it challenging to keep up. The best approach to avoid getting into unnecessary trouble with Uncle Sam is to hire a tax pro. They can help you file your return every year, keeping you away from the IRS radar.
A tax professional must be well informed about federal tax laws and its effect on your business. They can guide you on the right form to fill alongside the deductions and exemption that you qualify for. They also know the expenses you can legally claim to reduce your overall tax bill.
Also, they will guide you on legal means to save money into your retirement account such that you will not have to pay taxes and use the money to offset what you will send to Uncle Sam. In short. A tax pro can help you avoid the felony of tax evasion alongside its accompanying penalty.
Tax evasion is in no way similar to tax avoidance. With the right knowledge of tax avoidance, you can learn legal means to reduce your overall tax bill and stay away from jail.
