Is a carefully executed plan to minimize income or estate taxes also a tax dodge, scheme, avoidance trick, or scam? It depends. I have seen all those words used by the media to describe both tax fraud and legitimate tax-reducing strategies.
A case in point is an October 2 story in The New York Times, “Trump Engaged in Suspect Tax Schemes as He Reaped Riches From His Father.” This attempts, with considerable success, to refute Donald Trump’s assertion that he built his fortune on a one million dollar loan from his father. It also attempts to suggest that he multiplied his net worth by committing tax fraud.
The article left me with the question of how much of the Trump family’s maneuvering was legal tax avoidance and how much was actually criminal fraud. As The Times itself stated, “The line between legal tax avoidance and illegal tax evasion is often murky, and it is constantly being stretched by inventive tax lawyers. There is no shortage of clever tax avoidance tricks that have been blessed by either the courts or the I.R.S. itself. ”
Why would something that is legal and blessed by the courts and the IRS be described in such a negative manner? Two reasons come to mind. One, the reporters don’t understand tax strategies, which admittedly are intricate and often require a tax and legal background. Or two, the reporters have an agenda to cast a taint against an individual or company by framing tax-saving strategies as inherently wrong.
I am not attempting to defend anything that the Trump family did which was fraudulent. The Times is exactly right that there is a murky line between legal tax avoidance and illegal tax evasion. What I do not support is the implication that any complicated strategy to lower one’s tax bill that is accepted by the courts and the IRS is a “scheme,” a “scam,” a “dodge,” or a tax “evasion.”
As a financial planner, part of what I do is help clients implement legal tax saving strategies. I blatantly and proudly advertise that service, which requires a lot of education.
In 40-plus years, I’ve never had a client, regardless of their income level or political beliefs, opt to pay higher taxes when presented with a legal alternative to pay less. I have never heard one say, “Rick, I know by following your advice (to set up a retirement plan, bundle expenses into every other year, etc.) I could lower my taxes, but I really feel it’s my patriotic duty as an American to pay more.”
Yet many people, including some in the media, seem to view the desire to reduce one’s taxes as unpatriotic, greedy, or a stain on one’s character—at least for anyone who is wealthy or who runs for political office.
Why do some of the same people who use tax-saving strategies themselves become so outraged when someone with a billion dollars does the same? It may be due to subconscious money scripts of resentment or contempt for the rich. A typical example is the belief that, “Every successful business person is successful because they cheat the system.”
Any news story accusing someone of tax dodges and schemes needs to be read carefully. Did a court actually find them guilty of tax evasion? Did they use legal methods to pay lower taxes? Does the accuser appear to have an agenda of making the person look greedy and immoral?
Tax evasion is failing to pay taxes you owe. Tax avoidance is using the tax code to reduce the taxes you owe. Legally and morally, they are not the same thing.