U.S. Court of Appeals Judge Learned Hand, often described as a legal philosopher, and presided in that and similar appointed court positions for over 50 years, is famous for the following quote, taken from the 1934 case of Gregory v. Helvering:
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”
Sidenote: I find it interesting that in that court document ”treasury” is not capitalized like it is in modern usage, but “Courts” is. I chalk it up to signs of the times.
Learned Hand’s apt dissertation is the essence of tax avoidance - take advantage of every loophole left unplugged, all deductions allowed and each and every write-off you’re entitled to under the law. The point is, avoiding paying more tax than you absolutely have to pay is not only legal, but encouraged.
Tax avoidance is encouraged in two ways. First, through the increasing complexity of the U.S. Tax Code. The more convoluted the Code becomes, the less likely those who attempt to “go it alone” concerning tax matters will avail themselves of much benefit. The more an individual, family or business invests in expert CPAs and tax attorneys to assist them in navigating the murky soup of tax regulations, pronouncements, letter rulings and interpretations, the more likely the taxpayer will save more money from the IRS’s collection hat. The second way is achieved through the fact that the more experienced and sophisticated their tax CPA or attorney is, the more likely the client will be steered clear of legal pitfalls, nondefensible tax positions, frivolous tax arguments and IRS audit red flags. These points are especially important for those expatriate Americans, because even more tax law complexities apply to citizens residing in foreign countries.
Tax evasion is just plain illegal. There are two sides to the law, one of which you do not want to find yourself on: following the letter and possibly the intent of the law (tax avoidance), and placing yourself in harm’s way (tax evasion). There are civil tax penalities leveled against tax evaders for tax fraud, failure to pay, failure to file, accuracy-related penalties, and penalties relating to certain foreign persons, among many others. This does not include court fees, attorney fees and interest on unpaid portions of assessed tax liability. There is also the criminal prosecution process that can lead to indictment and possible incarceration.
Remember, Al Capone was only imprisoned due to being found guilty of criminal tax evasion. Among all of the horrible things he did, why is it that he was only prosecuted for tax evasion? Because it is often easier to prove than other felonious activities. Paper trails are a lot cleaner to follow than those evidence trails left behind after other crimes, from a forensic standpoint. Also, tax evasion often occurs over the course of many years, making the probability of successful prosecution much higher, since the evidence is spread across a greater span of years. If an IRS auditor or other forensic accounting detective for the prosecution can’t find what they’re looking for in a specific year, they move on to other years with which they might have luck.
Don’t want to subject yourself to being imprisoned at “The Rock” like Scarface (Capone)? Then make sure your tax CPA and/or tax attorney with domestic and international tax expertise keeps you on the safe side of the Great Divide of Tax Evasion vs. Tax Avoidance.