A distinction should be made between tax avoidance and tax evasion. The first one aims to lower the tax bill by structuring the transactions to reap the maximum tax benefits. Tax evasion or fraud is different. It is a conscious attempt to deceit the Internal Revenue Service (IRS) to reduce tax liabilities. A good accountant can lower your tax bill through tax avoidance. A bad one will commit tax fraud under your name.
If you aren’t sure where your taxes stand, call a tax attorney in California or other states. Have the lawyer take a look at your tax returns in the past years. If there’s anything out of the ordinary, the tax attorney can advise you on the steps to take to correct the misdeclaration. The IRS will penalize you for the attempt to conceal your income, but that’s better than facing jail time for tax fraud.
But you could also be unintentionally committing tax fraud. Your accountant might be doing it on your behalf, thinking it’s the only way to reduce your tax liabilities. Watch out for these:
Side Income
How about that money you have made from tips or doing freelancing work? Those are taxable, too. A source of income on the side is not a wage income, but it still needs to be reported. Other sources of income are tips, freelance work, bank account interest, gambling winnings, investments, rental property, and more. Businesses who pay a person more than $600 during the year need to file Form 1099. But even if you never received a 1099, you should still report your side income.
Non-cash Donations
When you donate a box of clothes to Goodwill or Salvation Army, you are given a receipt that lists down the things you have given. They don’t know the total value of this donation. That’s up to you to report. So if you value a small box of used clothes for $400, that’s tax fraud. You’re over-valuing your non-cash donations. To know how to value this donation, ask yourself how much another person will pay for these used clothes. If the answer is zero, then you shouldn’t report it as a deductible anymore.
Itemized Deductions
Taxpayers can choose itemized deductions over the standard deduction. That means that they can inflate the costs of medical expenses, education expenses, and other miscellaneous deductions. But this might not be the go-to strategy for accountants anymore. The Tax Cuts and Jobs Act now allows a standard $12,000 deduction for individuals and $24,000 for married couples.
Business Expenses
Businesses enjoy a lot of tax benefits. But this does not mean that they should deduct every expense they can think of. Many businesses deduct the entire cost of a vehicle even when that vehicle sparingly used for the business. Others will write off their phone bill expenses when they barely use the phone for the business. The rule of thumb is to determine the percentage of time that these items are used for business purposes. Then, deduct that percentage to your return.
As always, legal matters such as taxes are best discussed with a lawyer. Find a reputable tax attorney to give you advice on the proper way to structure your tax returns and deductibles. Don’t let your accountant make the decisions about your taxes. Keep up with it because your name is on that return.