 No matter how much financial planning you do, the biggest obstacles you’ll have to face is keeping up with your tax obligations.
You can have tax problems if you have a missed payment or filing deadline, incomplete records or an improperly claimed deduction. In such case your unawareness will not help you.
It would be rally useful to have a good tax expert helping you to avoid tax problems, however obtaining knowledge of taxes and tax systems will be also essential to those who deal with taxes.
Even if you entrust your tax duties to someone else, you still bear the ultimate responsibility for attaining those objectives.
Tax planning is a process of looking at various tax options in order to define which of them to use in conducting business and personal transactions so that the taxes were eliminated or decreased.
If you are a taxpayer or a businessman, you will frequently face the possibility to fulfill a transaction by more than one method of taxation. The courts strongly support your right to choose the method of taxation that will cause the lowest legal tax liability. That means that avoiding tax is entirely proper.
Tax evasion — the decreasing of taxes in deceitful ways, tricks, or harboring are forbidden. Very often the difference between tax evasion and tax avoidance is set by Internal Revenue Service’s (IRS) decision that there was some deceitful intent on the part of the taxpayer. These are the main four areas most commonly concentrated on by IRS examiners as pointing to possible cheating:
• The information about amounts of income, such as a shareholder's report about dividends, or a store owner's cash register.
• Fictitious or improper return deductions, such as exaggeration of travel expenses, or a taxpayer's claim of a large deduction for charity contributions when no verification exists.
• Accounting incorrectness, such as a company’s failure to keep adequate records, or a difference between amounts reported on a corporation's return and the ones reported on its financial statements.
• Improper distribution of income to a related taxpayer who is in a lower tax bracket.
Business owners are not allowed to decrease their income taxes by labeling a transaction as something that it is not. For example, if payments to stockholders are actually dividends, calling them "interest" or trying to conceal the payments as interest is forbidden. Taxability of the transaction is defined by its essence and not by its form.
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