There is a clear-cut difference between tax avoidance and tax evasion. One is legally acceptable and the other is an offense. Unfortunately however many consultants even in this country do not understand the difference between tax avoidance and tax evasion. Most of the planning aspects that have been suggested by these consultants often fall into the category of tax evasion (which is illegal) and so tends to put clients into a risky situation and also diminish the value of tax planning.

This may be one of the prime reasons where clients have lost faith in tax planning consultants as most of them have often suggested dubious systems which are clearly under the category of tax evasion.

In this chapter I provide some examples and case studies (including legal cases) of how tax evasion (often suggested by consultants purporting to be specialists in tax planning) is undertaken not only in this country but in many parts of the world. It is true that many people do not like to pay their hard-earned money to the government. However doing this in an illegal manner such as by tax evasion is not the answer. Good tax planning involves tax avoidance or the reduction of the tax incidence. If this is done properly it can save substantial amounts of money in a legally acceptable way. This chapter also highlights some practical examples and case studies (including legal) of tax avoidance.

Why Governments Need Your Taxes (Basic Economic Arguments)

Income tax the biggest source of government funds today in most countries is a comparatively recent invention, probably because the notion of annual income is itself a modern concept. Governments preferred to tax things that were easy to measure and on which it was thus easy to calculate the liability. This is why early taxes concentrated on tangible items such as land and property, physical goods, commodities and ships, as well as things such as the number of windows or fireplaces in a building. In the 20th century, particularly the second half, governments around the world took a growing share of their country’s national income in tax, mainly to pay for increasingly more expensive defense efforts and for a modern welfare state. Indirect tax on consumption, such as value-added tax, has become increasingly important as direct taxation on income and wealth has become increasingly unpopular. But big differences among countries remain. One is the overall level of tax. For example, in United States tax revenue amounts to around one-third of its GDP (gross domestic product), whereas in Sweden it is closer to half.

Others are the preferred methods of collecting it (direct versus indirect), the rates at which it is levied and the definition of the tax base to which these rates are applied. Countries have different attitudes to progressive and regressive taxation. There are also big differences in the way responsibility for taxation is divided among different levels of government. Arguably according to the discipline of economics any tax is a bad tax. But public goods and other government activities have to be paid for somehow, and economists often have strong views on which methods of taxation are more or less efficient. Most economists agree that the best tax is one that has as little impact as possible on people’s decisions about whether to undertake a productive economic activity. High rates of tax on labour may discourage people from working, and so result in lower tax revenue than there would be if the tax rate were lower, an idea captured in the Laffer curve in economics theory.

Certainly, the marginal rate of tax may have a bigger effect on incentives than the overall tax burden. Land tax is regarded as the most efficient by some economists and tax on expenditure by others, as it does all the taking after the wealth creation is done. Some economists favor a neutral tax system that does not influence the sorts of economic activities that take place. Others favor using tax, and tax breaks, to guide economic activity in ways they favor, such as to minimize pollution and to increase the attractiveness of employing people rather than capital. Some economists argue that the tax system should be characterized by both horizontal equity and vertical equity, because this is fair, and because when the tax system is fair people may find it harder to justify tax evasion or avoidance.

However, who ultimately pays (the tax incidence) may be different from who is initially charged, if that person can pass it on, say by adding the tax to the price he charges for his output. Taxes on companies, for example, are always paid in the end by humans, be they workers, customers or shareholders. You should note that taxation and its role in economics is a very wide subject and this book does not address the issues of taxation and economics but rather tax planning to improve your economic position. However if you are interested in understanding the role of taxation in economics you should consult a good book on economics which often talks about the impact of different types of taxation on the economic activities of a nation of society.

Tax Avoidance and Evasion

Tax avoidance can be summed as doing everything possible within the law to reduce your tax bill. Learned Hand, an American judge, once said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible as nobody owes any public duty to pay more than the law demands. On the other hand tax evasion can be defined as paying less tax than you are legally obliged to. There may be a thin line between the two, but as Denis Healey, a former British chancellor, once put it, “The difference between tax avoidance and tax evasion is the thickness of a prison wall.” The courts recognize the fact that no taxpayer is obliged to arrange his/her affairs so as to maximize the tax the government receives. Individuals and businesses are entitled to take all lawful steps to minimize their taxes.

A taxpayer may lawfully arrange her affairs to minimize taxes by such steps as deferring income from one year to the next. It is lawful to take all available tax deductions. It is also lawful to avoid taxes by making charitable contributions. Tax evasion, on the other hand, is a crime. Tax evasion typically involves failing to report income, or improperly claiming deductions that are not authorized. Examples of tax evasion include such actions as when a contractor “forgets” to report the LKR 1, 000,000 cash he receives for building a pool, or when a business owner tries to deduct LKR 1, 000,000 of personal expenses from his business taxes, or when a person falsely claims she made charitable contributions, or significantly overestimates the value of property donated to charity.

Similarly, if an estate is worth LKR 5,000,000 and the executor files a false tax return, improperly omitting property and claiming the estate is only worth LKR 100,000, thus owing much less in taxes. Tax evasion has an impact on our tax system. It causes a significant loss of revenue to the community that could be used for funding improvements in health, education, and other government programs. Tax evasion also allows some businesses to gain an unfair advantage in a competitive market and some individuals to not meet their tax obligations. As a result, the burden of tax not paid by those who choose to evade tax falls on other law abiding taxpayers.

Examples of tax evasion are: ï?~ Failing to declare assessable income ï?~ Claiming deductions for expenses that were not incurred or are not legally deductible ï?~ Claiming input credits for goods that Value Added Tax (VAT)has not been paid on ï?~ Failing to pay the PAYE (pay as you earn a form of with holding tax)installments that have been deducted from a payment, for example tax taken out of a worker’s wages ï?~ Failing to lodge tax returns in an attempt to avoid payment. The following are some signs that a person or business may be evading tax: ï?~ Not being registered for VAT despite clearly exceeding the threshold ï?~ Not charging VAT at the correct rate ï?~ Not wanting to issue a receipt ï?~ Providing false invoices ï?~ Using a false business name, address, or taxpayers identification number (TIN) and VAT registration number ï?~ Keeping two sets of accounts, and ï?~ Not providing staff with payment summaries

Legal Aspects of Tax Avoidance and Tax Evasion Two general points can be made about tax avoidance and evasion. First, tax avoidance or evasion occurs across the tax spectrum and is not peculiar to any tax type such as import taxes, stamp duties, VAT, PAYE and income tax. Secondly, legislation that addresses avoidance or evasion must necessarily be imprecise. No prescriptive set of rules exists for determining when a particular arrangement amounts to tax avoidance or evasion. This lack of precision creates uncertainty and adds to compliance costs both to the Department of Inland Revenue and the tax payer.

Definitions of Tax Mitigation Avoidance and Evasion It is impossible to express a precise test as to whether taxpayers have avoided, evaded or merely mitigated their tax obligations. As Baragwanath J said in Miller v CIR; McDougall v CIR: What is legitimate ‘mitigation'(meaning avoidance) and what is illegitimate ‘avoidance'(meaning evasion) is in the end to be decided by the Commissioner, the Taxation Review Authority and ultimately the courts, as a matter of judgment. Please note in the above statement the words are precisely as stated in judgment. However there is a mix-up of words which have been clarified by the words in the brackets by me. Tax Mitigation (Avoidance by Planning) Taxpayers are entitled to mitigate their liability to tax and will not be vulnerable to the general anti-avoidance rules in a statute. A description of tax mitigation was given by Lord Templeman in CIR v Challenge Corporate Ltd: Income tax is mitigated by a taxpayer who reduces his income or incurs expenditure in circumstances which reduce his assessable income or entitle him to reduction in his tax liability.

Tax mitigation is, therefore, behavior which, without amounting to tax avoidance (by planning), serves to attract less liability than otherwise might have arisen. Tax Avoidance Tax evasion, as Lord Templeman has pointed out, is not mere mitigation. The term is described directly or indirectly by ï?~ Altering the incidence of any income tax ï?~ Relieving any person from liability to pay income tax ï?~ Avoiding, reducing or postponing any liability to income tax On an excessively literal interpretation, this approach could conceivably apply to mere mitigation, for example, to an individual’s decision not to work overtime, because the additional income would attract a higher rate of tax. However, a better way of approaching tax avoidance is to regard it as an arrangement that, unlike mitigation, yields results that Parliament did not intend.

In Challenge Corporation Ltd v CIR, Cooke J described the effect of the general anti-avoidance rules in these terms: [It] nullifies against the Commissioner for income tax purposes any arrangement to the extent that it has a purpose or effect of tax avoidance, unless that purpose or effect is merely incidental. Where an arrangement is void the Commissioner is given power to adjust the assessable income of any person affected by it, so as to counteract any tax advantage obtained by that person. Woodhouse J commented on the breadth of the general anti-avoidance rule in the Challenge Corporation case, noting that Parliament had taken: The deliberate decision that because the problem of definition in this elusive field cannot be met by expressly spelling out a series of detailed specifications in the statute itself, the interstices must be left for attention by the judges.

Tax Evasion Mitigation and avoidance are concepts concerned with whether or not a tax liability has arisen. With evasion, the starting point is always that a liability has arisen. The question is whether that liability has been illegitimately, even criminally been left unsatisfied. In CIR v Challenge Corporation Ltd, Lord Templeman said: Evasion occurs when the Commissioner is not informed of all the facts relevant to an assessment of tax. Innocent evasion may lead to a re-assessment. Fraudulent evasion may lead to a criminal prosecution as well as re-assessment.

The elements which can attract the criminal label to evasion were elaborated by Dickson J in Denver Chemical Manufacturing v Commissioner of Taxation (New South Wales): An intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion. Not all evasion is fraudulent. It becomes fraudulent if it involves a deliberate attempt to cheat the revenue. On the other hand, evasion may exist, but may not be fraudulent, if it is the result of a genuine mistake. In order to prove the offence of evasion, the Commissioner must show intent to evade by the taxpayer. As with other offences, this intent may be inferred from the circumstances of the particular case. Tax avoidance and tax mitigation are mutually exclusive. Tax avoidance and tax evasion are not: They may both arise out of the same situation. For example, a taxpayer files a tax return based on the effectiveness of a transaction which is known to be void against the Commissioner as a tax avoidance arrangement.

A senior United Kingdom tax official recently referred to this issue: If an ‘avoidance’ scheme relies on misrepresentation, deception and concealment of the full facts, then avoidance is a misnomer; the scheme would be more accurately described as fraud, and would fall to be dealt with as such. Where fraud is involved, it cannot be re-characterized as avoidance by cloaking the behavior with artificial structures, contrived transactions and esoteric arguments as to how the tax law should be applied to the structures and transactions. Tax Avoidance in a Policy Framework We now turn from the existing legal framework in the context of income tax to a possible policy framework for considering issues relating to tax avoidance generally. The questions considered relevant to a policy analysis of tax avoidance are: What is tax avoidance? Under what conditions is tax avoidance possible? When is tax avoidance a ‘policy problem? What is a sensible policy response to tax avoidance?

What is the value of, and what are the limitations of, general anti-avoidance rules? The first two questions are discussed below What is Tax Avoidance? Finance literature may offer some guidance to what is meant by tax avoidance in its definition of ‘arbitrage’. Arbitrage is a means of profiting from a mismatch in prices. An example is finding and exploiting price differences between New Zealand and Australia in shares in the same listed company. A real value can be found in such arbitrage activity, since it spreads information about prices. Demand for the low-priced goods increases and demand for the high-priced goods decreases, ensuring that goods and resources are put to their best use. Tax arbitrage is, therefore, a form of tax planning. It is an activity directed towards the reduction of tax. It is this concept of tax arbitrage that seems to constitute generally accepted notions of what is tax avoidance. Activities such as giving money to charity or investing in tax-preferred sectors, would not fall into this definition of tax arbitrage, and thus would not be tax avoidance even if the action were motivated by tax considerations. It has been noted that financial arbitrage can have a useful economic function. The same may be true of tax arbitrage, presuming that differences in taxation are deliberate government policy furthering economic efficiency.

Are you struggling to make all of your payments on time every month? Are you getting behind? You’re not the only one – in fact millions of people around the world need help with debt problems. No matter how bad your finances seem, there is always somebody out there who has it even worse. The good news is that since it is such a common problem, there are many programs and services available to help those with debt issues.

Since there are so many services, however, not all of them are going to be very good. Some are just a waste of money and time. There are certain types of debt that no debt relief organization will be able to help with, such as child support, government loans, utility bills, etc. Mostly, there are programs to help with credit card debt, certain types of loans, tax relief, and medical bills.

The first step before contacting any of these organizations is to make a list of all of your bills and the minimum payment you owe each month. If possible, try and prioritize them. The bills you need to pay in order to live should be at the top, as well as mortgage if you owe any. If you have secured lines of credit with collateral that you could be in danger of losing, then that should be near the top also.

Services that Offer Help With Debt Problems

The next step is to look over services and read reviews on the best companies that provide help with debt problems. You should obviously never pay for a consultation or estimate. Only consider companies that will speak with you and give you a consultation for free before deciding on a strategy that would be best suited for your needs.

Will a debt management program be ideal? Debt settlement? Bankruptcy? Negotation? A debt extension loan? A new repayment strategy? Will the program you join benefit you in ways such as helping you obtain lower interest rates or discounts? These are all important options to consider when seeking help with debt problems.

A consolidation loan, as nice and convenient as it sounds, isn’t for everyone. For some indidivuals, the best solution is to leave certain debts where they are, and try to get some professionals to negotiate on their behalf to lower the interest rates and provide them with some relief to make it easier to make payments.

Debt negotiation should be viewed as a last-resort measure before filing bankruptcy. A lender has little motivation to accept a pay off for less than the full amount unless the debtor is already months behind on bills. Debt negotiation, also sometimes called debt settlement or debt arbitration, is best reserved for use when debt is seriously delinquent. If you’re considering debt negotiation, it’s important to be informed about all the options available to help you deal with your debt.

Contact your creditors, negotiate payment arrangements, ask permission to skip a payment, or ask for a lower interest rate. These are simple measures you can take as a first step to manage your debt. Try these options first before you attempt any other course of action.

If you have a large amount of debt, a qualified credit counseling service may be able to help you reduce payments and prevent further damage to your credit report. Although credit counseling can provide consumers with valuable assistance, some firms exist only to cheat their unknowing clients. These companies use their non-profit status to attract customers who are then scamed into paying large upfront fees. Those fees are then sometimes funneled to for-profit companies. Recently, the FTC and IRS issued the following tips for choosing a credit counseling organization.

* Pay very careful attention to the fees you are being charged, the nature of the services the agency offers, and the terms of the contract.
* Check to make sure that your creditors are willing to work with the agency the you plan to choose
* Consider using agencies that offer actual counseling and education, instead of simply enrolling all clients in a debt management program

Another option for consumers overwhelmed by debt is to consolidate debt by establishing a new loan (debt consolidation loan) with lower monthly payments. A debt consolidation loan helps manage your debt because the loan is usually over a longer period of time and possibly at a lower interest rate than your existing debt. Consolidation should be used when debts are mostly current.

While there are many options to help you cope with unmanageable debt, sometimes debt negotiation may be the only appropriate course of action remaining. For example, debt negotiation would be a good course of action if a long-forgotten debt is the only bad entry on your credit report. However, keep in mind, you may owe income tax on the debt owed. Any forgiven debts of $600 or more are considered income to the consumer. If you do negotate a debt down, the creditor will send you and the IRS a Form 1099-C at the end of the tax year.

As a general safety precaution, anyone who plans on using a third party to handle their finances should remember to check them out with the Better Business Bureau and State Attorney General’s Office of Consumer Protection. These agencies keep records of credit repair services that have mislead their customers about the impact the service would have on their credit rating, the fees involved, and the possibility of legal action from the creditors.

The cat is out of the bag and debt settlement companies are facing adaptation or extinction. Debt settlement can be a tedious process that lasts from a year to four or more depending on the extent of the debt load.

For the most part these settlement companies will explain the process along with the pros and cons of a debt settlement.

The pros:

-Settle debt for less than the amount owed

-Get out of debt faster than paying it all off

-Avoid bankruptcy if you are able to afford the process and have a smooth ride

-Once you are done you can reestablish your credit quicker

So really the benefit of the program lies in a quicker debt relief option and the avoidance of having bankruptcy on your record:

The cons:

-hurts credit badly for duration of the program

-you might get sued and get a judgment on your record (maybe even wage garnishment)

-you will get collector calls

-you will have to pay taxes on the debt forgiven

There are always negatives that come with the pluses and every individual will have to determine if the pluses are worth more to them than the possible negative consequence.

However, negotiating the debt on your own with a do it yourself program will definitely have one major benefit, no exorbitant fees (such as 15% of total debt), along with the bonus that creditors prefer to work with you directly rather than a debt settlement company which might decrease the chances of you getting sued significantly.

Do it yourself debt settlement is led by a passion, or hatred rather, towards eliminating debt in an efficient, affordable manner. This is all about bringing about an awareness that the consumers can eliminate their own debts without hiring a very expensive debt settlement company.

But how can it be done?

By choosing the best possible educational portal that provides the most convenient system and make sure that the consumer can adhere to.

Find a debt settlement guide that will include a system rather than just a book, audio CD’s, and simple tables or charts. Those can become tedious and the debtor, already having enough on their plate, might give up thinking it’s too hard and just go ahead and sign up with a debt settlement company after just wasting their money on a do it yourself debt settlement course.

Consumers do not need a course or a cheap e-book put together from free material already found on the web. You need to stay away from those and do enough research to make sure the system you purchase will have enough support to be able to guide you through the entire process to finish.

One thing is for certain: soon consumers will never have to spend any more money on these debt settlement companies and debtors that were not able to afford that option before, or didn’t qualify will soon have the best agent working for them: themselves.