Al Capone. Heidi Fleiss. Martha Stewart. Wesley Snipes. What do these people all have in common? Tax evasion.
No one wants to pay more than their fair share of taxes, but there is a fine line between being within the tax law and blatantly crossing over the proverbial line. While reducing the amount of tax you owe is not necessarily a bad thing, make sure you are doing it not only legally, but with an eye towards your future. Tax returns are used for much more than reporting income to the government. They are also used to secure loans and attract investors, maximizing your retirement and with the long term goal if applicable, of selling your company. If you consistently try to reduce income to avoid tax, you may be hurting yourself.
If you want to get a bank loan for your business, a line of credit, or a home equity loan, the bank will request your tax return. That will be one of the main documents they use to determine how much to lend you. If you are showing a low level of income, they will not take your word that you actually make more but just didn’t want to pay tax.
The other thing is you could be potentially reducing the amount you could put towards your own retirement. Some plans factor in the amount of income a business makes. If you are driving down income for taxes, you also drive down your ability to take advantage of saving for your future.
Another area where you could hurt yourself is in selling your business. If the business shows little to no net income every year, even with higher gross income, you lose the maximum you could earn from the business. While you know the true value, a buyer is likely going to have to get financing, and if they can’t prove what the business is truly worth, they won’t get a loan.
Rather than looking at a tax year in a silo, make sure to view it from the perspective of how does this year affect next year? Or 5 years from now? 20? 30? Is it really worth crippling your ability to secure loans, save for retirement, or in selling your business at top dollar to save money now? Also consider you always need to be prepared in case you get audited. If you were audited and penalized for accuracy related issues, there could be a 20% penalty on the underpayment of tax. A fraud penalty comes in at 75%. Yikes!
