Avoidance versus Evasion: Just Tax Semantics?Posted October 22nd, 2010
Why is this Topic Important to Wealth Managers? Provides a brief discussion on the difference between tax avoidance versus evasion, the former earns wealth managers checks and the latter can send them to jail. Knowing the difference, when to spot it, and how to “avoid evasion” is essential to any wealth manager’s tool kit.
Tax avoidance is “The act of taking advantage of legally available tax-planning opportunities in order to minimize one’s tax liability.”  On the other hand, tax evasion is the “willful attempt to defeat or circumvent the tax law in order to illegally reduce one’s tax liability. 
From the above definitions, and the function of the tax code itself, the line becomes blurred between taking advantage of legally available planning opportunities and a willful attempt to circumvent the tax law. A well known quote often attributed to Will Rogers speaks to this point. “The income tax has made more liars out of the American people than golf has. Even when you make a tax form out on the level, you don’t know when it’s through if you are a crook or a martyr.” 
Today’s advanced transactions are even more difficult to understand in regards to an ever expanding tax code. Even over 50 years ago, (well before the Revised 1983 Code) it was said by one of the world’s most famous scientists, Albert Einstein, “The hardest thing in the world to understand is the income tax.”  So if Einstein had trouble with calculation of income tax liability, in the 30s-40s what can wealth managers do to not only keep their clients safe, but also maximize every opportunity?
- Stay Informed – A plan that may have been okay last year may be under attack currently. Some forms of retirement plans were the classic example of this.
- Ask an Attorney and/or Accountant– If a wealth manager is planning a transaction that he/she is not absolutely sure of the consequences, in other words willing to risk licensing and professional liability, then it would be prudent to seek tax and/or legal advice for the client. A small amount of billable time now can go a long way later, even if to just confirm initial conclusions.
- Don’t Stay too Limited – If a wealth manager hears of a beneficial concept for a client that makes sense, it may be worth exploring. As we continue further into a global economic climate, many more international opportunities are becoming available. Just with any other investment opportunity, risk levels vary based on various factors.
- Don’t Cheat – Know the rules of the game, and play the game the best it can be played within those rules. Take for example, the recent “Father & Son” Cohen tax evasion case in South Florida. The Times reported , “Prosecutors said the Cohens used offshore companies, friends and family posing as owners, and forged documents to cheat on their taxes. They said the Cohens should have declared income from their use of mansions and luxury cars that the father and son said were owned by corporations.”
Whomever was advising the Cohens, based on the information provided, was not doing a good job. The Cohens were convicted at trial of “hiding a $33 million hotel sale from federal tax authorities while living a lavish lifestyle.”
It should be quite clear from the above example that forged documents are obviously illegal and wealth managers should make every attempt to avoid participating with anyone who has an intent to defraud. There is always a line in the law, and although what the line is, or where it lies is not always clear, wealth managers should be able to distinguish clearly illicit activity. With that in mind, it has long been the reasoning of the High Courts that for the reason and in favor of the “astuteness of taxpayers in ordering their affairs so as to minimize taxes we have said that ‘the very meaning of a line in the law is that you intentionally may go as close to it as you can if you do not pass it.’ ” 
Tomorrow’s blogiticle will discuss tax advantageous solutions such as bonds.
We invite your questions and comments by posting them below, or by calling the Panel of Experts.
 Black’s Law Dictionary (8th ed. 2004), tax avoidance.
 Black’s Law Dictionary (8th ed. 2004), tax evasion.
 See generally, Charlie Kelliher, PhD. Associate Professor, Dixon School of Accounting – University of Central Florida. http://www.bus.ucf.edu/ckelliher/tax_5015/examples/tax_quotes.htm. Last Accessed 10/6/10.
 “Father and Son Found Guilty of Tax Evasion.” New York Times crediting Bloomberg News. http://www.nytimes.com/2010/10/07/business/07tax.html?_r=1&src=busln. Published: October 6, 2010. Last Accessed 10/6/10.
 Atlantic Coast Line R. Co. v. Phillips 332 U.S. 168, 172-173, 67 S.Ct. 1584, 1587 (U.S. 1947) citing, Superior Oil Co. v. State of Mississippi, 280 U.S. 390, 395, 396, 50 S.Ct. 169, 170, 74 L.Ed. 504.