Tax Avoidance Versus Tax Evasion

1. Tax avoidance versus tax evasion:

A. Tax avoidance versus tax evasion: Good businesspeople should arrange their economic affairs in the best possible way to legitimately reduce income taxes. They have no duty to pay more than the law requires. As the famous Judge Learned Hand said, "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes..." [Helvering v. Gregory (69 F.2d 809, 810), 2d Cir. 1934]. Judge Hand reasserted the opinion when he wrote:

Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant. [Commissioner v. Newman (197 F.2d 848, 850–51), 2nd Cir. 1947]

On the other hand, if a taxpayer intentionally fails to report income, that taxpayer is illegally evading taxes. Let's look at the different ways in which the IRS may determine whether a taxpayer is avoiding (i.e., minimizing their tax liability) or evading taxes (i.e., not paying taxes that are required to be paid under the Tax Code). The IRS relies on determining what the taxpayer's mens rea is, and conduct that may be determined unlawful includes the following:

• Keeping two sets of books or records, especially in a cash-based service business, which could lead to concealment of income

• Consistently making false or erroneous bookkeeping entries

• Creating false documentation to support false bookkeeping or tax records

• Knowingly providing false information to a tax return preparer

• Not maintaining records; that is, destroying records

• Storing