Tax Evasion or Tax Avoidance
Asha’s action constitutes tax avoidance which is not a crime. Tax avoidance is the lawful exploitation of the income tax system to one’s personal advantages, towards reduction of the total amount of income tax that is owed or payable, through legally acceptable means (Slemrod 63). On the other hand, tax evasion refers to deliberate efforts that are aimed at ensuring one does not pay legally liable taxes (Slemrod 63).
The taxable income of 2007 puts Asha in the thirty-three percent marginal tax bracket. Her decision to purchase new equipment for her business constitutes investment for the business, meaning it wouldn’t be taxable. A special election allows Asha to treat the $25,000, which is the cost of the equipment as a current period expense of (year 2007 up to the end of year i.e. business year which is a period of twelve months).
This means she would be exempted from paying extra tax that is to be in a lower tax bracket come next year, 2008 which is the continuation of the year of income i.e. business year. She is entitled for tax deduction if the equipment purchased is for producing income for the business and in this case the equipment has to be capitalized in the year of purchase (2007). She therefore qualifies for a tax deduction which described as a diminution of a taxpayer’s overall revenue that decreases the total amount of cash used in calculating the tax owed (Slemrod 72).
As a certified public accountant I would therefore prepare and sign her tax return because the Statements of Standards for Tax Services (SSTS) 2a states,
“a member should not recommend that a tax return position be taken with respect to any item unless the member has a good faith belief that the position has a realistic possibility of being sustained administratively or judicially on its merits if challenged” (TaxExecutiveCommittee). Therefore, am justified to prepare and sign Asha tax return as she has filed tax returns that are accurate since I am sure this position cannot be challenged since it doesn’t contravene accounting principles and standards.
Conor and Schneider Positions
The position taken by Mr. Conor is tax evasion which is a crime and subject to charges and significant penalties (Slemrod 64). The purchase of artworks for home and office use does not constitute business as this is a personal expense and should not be treated as tax deductible expenses. Only those expenses that are meant to yield income for the business should be deducted for tax purposes; thus, any form of gifts to employee would not qualify for tax deductable expenses. Based on the case study it seems Mr. Conor has been doing this for several years which shows frequency of misconduct.
Mr. Schneider did not comply with the professional norms of conduct as spelled out by the various relevant bodies such as Certified Public Accountants Statement on Standards for Tax Services of conduct and Internal Revenue Service circular 230 (InternalRevenueService.gov). Schneider who is the certified public accountant is responsible for preparing and signing Mr. Conor’s tax returns and he must adhere to circular 230 of Internal Revenue Service which requires him to exercise “due diligence when preparing or supporting in the grounding of, approving, and filing income tax returns, manuscript, affidavits and other documents recounting to Internal Revenue Service matters” (InternalRevenueService.gov). He is also expected to advise his client accordingly in a manner that upholds the accounting standards as outlined by the IRS.
Based on the case study, we can see how Schneider advises Conor to capitalize the artwork which is contrary to the law by telling him to treat the artwork as gifts given to employee as forms of additional compensation. Nevertheless, Conor refuses but Schneider continues to insist and the cost of artwork is eventually deducted from the tax returns. In fact, Schneider claims that this has been the norm in the previous years on tax returns which have always been prepared by Conor. If indeed this is true, it tells us two things; one, that Conor is negligent professionally since he had allowed this to happen those times, and two that he does not keep accounting records as required by law which is the reason he can’t remember.
Now, Conor has even another greater responsibility as a CPA which he appears to have disregarded according to this case scenario; it is that of advising his client on all matters pertaining to illigalities when filing tax returns.
Statement on Standards for tax in it articles has outlined this duty aptly and states when recommending tax return positions and when preparing or signing a return on which a tax return position is taken, a member should, when relevant, advice the taxpayer regarding potential penalty consequences of such tax return position and opportunity, if any, to avoid such penalties through disclosure” (Kirchler, Maciejovsky and Schneider 87).
Clearly, Conor failed to do so and in his mitigation Schneider might have to use this fact as claim of ignorance.
Works cited
InternalRevenueService.com. Treasury Department Circular No. 230: Code of Federal Regulations. Department of the Treasury, 2007. Web.
Kirchler, E., Maciejovsky, B., & Schneider, F. “Everyday representations of tax avoidance, tax evasion, and tax flight: Do legal differences matter?.” Vienna: University of Vienna, 2002. Print.
Slemrod, J. “Policy in the real world.” Cambridge: Cambridge university press, 1999. Print.
TaxExecutiveCommittee. “Statements on Standards for Tax services.” New York: American Institute of Certified Public Accountants, inc., 2000. Print.