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In our practice, many general questions come up time and time again. Some are listed here. The questions and answers are admittedly simplified; there are likely many wrinkles to consider, namely your unique circumstances.
Tax Planning FAQs
There is a common confusion with these two terms. Tax evasion is illegal, but tax avoidance is not. Tax evasion involves a willful affirmative action to avoid paying taxes when a tax obligation exists. Consequences of tax evasion can include fines, penalties and imprisonment. Tax avoidance is, simply stated, locating and utilizing legal loopholes to reduce your tax burden. The following quote from Judge Learned Hand summarizes tax avoidance beautifully “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934). At TLC Law, we are in the business of tax avoidance; we can look at your tax footprint and attempt to find legal ways to reduce your tax burden.
Everyone’s tax situation is a little different, and the new tax law does little to simplify or provide clear cut answers. For the most part, the new law will not go into effect until the 2018 tax year (although some provisions start in 2019). It is an expansive law that changes much of the tax landscape. It is on its face, business friendly. The federal income tax rates have been lowered for most businesses, but some previously allowed deductions have been repealed or reduced.
KPMG has issued a great summary of the new tax law. It can be located at https://home.kpmg.com/content/dam/kpmg/us/pdf/2017/12/tnf-new-tax-law-dec22-2017.pdf
It is important to start the conversation early with your tax advisor on how these changes will affect you. We can work jointly with your CPA to ensure your tax obligations related to this law don’t hit you in the face unexpectedly.
There are many considerations when creating a new entity. Variables to consider includes preferred tax treatment, number of owners, future plans of the business, liability protection, etc. There are many attorneys who tout their expertise in business formations, but few can also tout an extensive knowledge of tax laws and drafting all accompanying documentation. Most entities should be formed as LLCs or PLLCs. There is little reason to create any other entity. However, the new tax law may provide tax incentive to create C corporations for certain entities.
The Texas Secretary of State has helpful forms and articles on entity formation https://www.sos.state.tx.us/corp/businessstructure.shtml
S Corporations are purely a figment of tax law. You cannot create an S corporation under the Texas Secretary of State. S corporations have limitations placed on its shareholders such as all shareholders must be individuals (or estates and some trusts) and must be U.S. residents. There is also a cap at 100 shareholders. The primary benefit of electing S status is to lower payroll tax liability through reasonable compensation and receiving one level of income tax. However, an entity level tax return is required along with quarterly payroll filings. These additional administrative
burdens may not be worth the payroll tax benefits. In addition the savings on payroll tax
may not be enough to warrant a reduced deduction on qualified business income. Since an S corporation is usually either an LLC or a corporation under state law, the limited liability provisions are still intact. Forms needed to file an S election include: Form 2553 https://www.irs.gov/pub/irs-pdf/f2553.pdf and form 8832 https://www.irs.gov/pub/irs-pdf/f8832.pdf. It is very important that these forms are filled out correctly and by a tax professional. I have seen many deals go south because these forms were filed incorrectly.
- (1) a return is filed
- (2) taxpayer receives a notice of the audit
- (3) the taxpayer receives a 30-day letter outlining the decision of the revenue office (the Revenue Agent’s Report
- (4) the taxpayer receives a statutory notice of deficiency or a 90 day letter
- (5) the taxpayer goes through the administrative appeals process if desired
- (6) a decision is reached about the deficiency
- (7) assessment
- (8) collection process begins which can include wage garnishment, liens, and levies. The IRS has drafted a helpful publication on the collection process. https://www.irs.gov/pub/irs-pdf/p594.pdf
My students at SFA used to ask me this question all the time. The truth is that at the highest levels of tax planning (such as at Deloitte or PricewaterhouseCoopers), there is little difference in a tax accountant versus a tax attorney. Both are responsible for researching complicated tax issues, articulating that research in written format, and structuring complicated transactions.
However, a tax accountant cannot draft any legal documents such as a stock acquisition agreement or a partnership agreement. At the same time, tax attorneys do not usually file tax returns as malpractice insurance policies for attorneys do not usually cover tax preparation.
Outside of mega accounting and law firms in mega cities, the role of tax accountants versus tax attorneys is quite different. Tax accountants are largely responsible for preparation of all tax returns and researching some tax questions. Tax attorneys draft all legal documents and research and plan for more complicated tax issues and transactions. The ethical obligations for attorneys and accountants differ significantly. Each profession has a separate governing body for enforcing its own ethical standards. However, attorneys have an important tool that accountants do not—the attorney-client privilege.
This privilege is vital to keeping unwanted tax and other legal documents out of the hands of the IRS or any other opponent. Note that both tax accountants and tax attorneys are governed by certain ethical standards created by the IRS for tax practitioners called Circular 230. In this way, tax attorneys are very different from other attorneys in that we answer to both our state bar licensing board and the IRS for our ethical guidance and limitations.
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