Tax Avoidance v. Tax Evasion — What’s the difference?

by | Mar 30, 2017 | Business Law, Tax Planning

In our last post we provided tips on how to save money through careful planning this tax season. But remember, there’s an important difference between tax avoidance and tax evasion. Tax avoidance is smart planning, tax evasion is illegal!

Whether your income is fifty thousand or fifty million, the IRS doesn’t take kindly to tax evasion. Just ask Al Capone how failing to pay taxes on his bootlegging income worked out.

Of course the average tax dodger isn’t going to get 11 years in Alcatraz, hiding income from the IRS and taking aggressive deductions has sent some very rich and famous people to prison. So let these celebrities’ mistakes serve as our top four lessons on what NOT to do when you file your return this April:

  1. Reporting personal expenses as business deductions: Nicholas Cage

In 2008 the IRS alleged that National Treasure actor Nicholas Cage had bilked the national treasury by falsely claiming $3.3 million in personal expenses as business deductions between 2002 and 2004. The deductions Mr. Cage attempted to claim included limos, gifts, travel, and his Gulfstream turbo jet. One of the best ways to avoid triggering an audit by your business expenses is to follow the guidelines in IRS Publication 535 and carefully log all business travel by plane or by car. If you use a car for both personal and business travel, know that depreciation, maintenance, and gas can only be deducted in proportion to business miles traveled or by a standard deduction of 54 cents per business mile. When it comes to deducting that night out with a client, remember that you may only deduct 50% of your business entertainment and meal expenses.

  1. Failing to report overseas income, domestic income, or even just file a return: Wesley Snipes

Despite being the lead actor in Blade, Wesley Snipes isn’t exactly the sharpest knife in the drawer. Mr.  Snipes is living proof that even the rich and famous are prone to falling for crackpot tax schemes. Mr. Snipes failed to file tax returns between 1999 and 2004, arguing that a supposed loophole in the tax code precluded collection of taxes on domestic income. The IRS was not impressed and Mr. Snipes was sentenced to three years in prison for his failure to file.

  1. Dodging property taxes in style: Martha Stewart

Kitchen aficionado Martha Stewart sure loves to cook. Whether it’s cooking her trading books or cooking her tax return, Martha always goes big. Less known than her famous insider trading fraud is Martha’s simpler scheme of tax evasion. Martha attempted to claim an exemption from property taxes on her home in the Hamptons because she didn’t spend much time there. The State of New York forced her to pay $220,000 in penalties and back taxes, demonstrating that no matter how many homes you own you can’t avoid property taxes.

  1. Failing to report unconventional income: Pete Rose

Cincinnati Reds legend Pete Rose definitely wasn’t an all-star taxpayer. In April 1990 the three-time World Series champion was sentenced to 5 months in prison for failing to report income from signed autographs, memorabilia, and horse racing proceeds. So if you hit it big by playing the ponies or counting cards, don’t forget that “what happens in Vegas stays in Vegas” doesn’t apply to income reporting. Still, unlucky gamblers can take heart- the IRS allows recorded gambling losses to be deducted up to the amount of all winnings.

If you have any tax or business law questions, please don’t hesitate to contact us today.