Demystifying Tax Strategy
The IRS isn’t a villain, but it can be if you make it one.
The United States tax system is daunting and complex, but simply put, it’s an honor system enforced by the IRS to make sure the U.S. Treasury Department collects enough money to run the country. Revenue Code Section 61 clearly states, “all income from whatever source derived” must be reported.
Violating this rule is practically the easiest thing in the world.
An Addicus client, Jim, owns a house in a college town, where his son lives with roommates. Rather than collect the roommates’ rent himself and give his son an allowance, Jim just lets the roommates pay rent to his son each month. He doesn’t report this income because it’s off the books and never exactly touches his hands.
While this is convenient and seemingly inconsequential, this and situations like this are tax evasion. There’s no wiggle room on income reporting, so you might as well embrace it and have a good attitude about it.
And here’s why:
If you do not fully disclose your income, you are most likely losing money.
Sure, tax fraud (and even mindless tax evasion) is illegal, but it also takes an extremely short-term view on tax planning. Because they don’t want to get caught with an audit, folks take a very conservative, black-and-white position on their tax return. They leave money on the table to avoid scrutiny, to slide under the IRS’s radar.
If you have nothing to hide, it’s perfectly fair to take a favorable and justifiable position by filing a defensible tax return. After all, the IRS isn’t out to pick a fight with you. They’re the traffic cops of finance. Sometimes the IRS is correct in its challenges against a tax return. Other times, it challenges a position and later backs off, or even loses. There’s rarely any severe punishment at stake in the former, just an order to pay the difference in a timely manner. You stand to make a lot of money if your positions are correct.
There’s a huge difference between tax fraud and evasion versus tax mitigation and planning.
At Addicus, we’re interested in tax mitigation and planning.
Most folks want to get paying their taxes over with as quickly as possible. During the year, they want to think as little as possible about tax season, and by extension, that’s how they want their CPAs to work too.
Addicus takes your taxes into account when assessing your Personal Financial Enterprise (PFE). A properly run PFE needs more than a tax routine. It needs a tax strategy—from the way you run your business to the types of investments you make. Forming and executing a tax strategy takes discipline, but Addicus is dedicated to arranging, establishing, and documenting the proper facts and circumstances throughout the year that will minimize liability come tax season.
If you’ve been cutting corners on your taxes or burying your head in the sand altogether, it’s time to take control, and take control the right way. Addicus has the expertise and knowledge to assist in preparing a tax return that will receive the least amount of scrutiny and will be defensible if the need arises.
The next few blog posts will address some common mistakes and misconceptions around taxation. Hopefully, these posts will shed light on the process and give you a little more courage and mindfulness as you steer your PFE on its journey to fruition.