Friday, September 30, 2016

Tax Avoidance

I got a question from Elizabeth on my blog this week:

I was wondering something today after thinking about the debate. There was a point when Clinton said Trump doesn't pay his taxes, and his responses were "That makes me smart" and "It would have been squandered too, believe me." What does/can the IRS do when someone doesn't pay their taxes for so many years? And if he hasn't been somehow made to pay his taxes, why?

Clinton was referring to "tax avoidance", which is the term for when someone legally lowers their taxes. One popular way to avoid paying taxes is to give a lot of money to charity, then claim it as an itemized deduction. The money you give to charity can't be taxed; therefore, by giving money to charity, you pay less in taxes! Both Clinton and Trump have done this in the past, by giving money to the Clinton Foundation and Trump Foundation.

When you're as rich as Trump or Clinton, you can afford to hire the best accountants, who will get your taxes as low as possible. Mitt Romney's accountants were able to lower his effective tax rate from 35% to 14%. That's a lot of tax avoidance! Some people think lowering your taxes is a smart thing to do, while other people think that it's dishonest and cheats the government. Clearly, Clinton was accusing Trump of avoiding taxes in a dishonest fashion.

"Tax evasion" is the term for when someone doesn't pay the taxes they legally owe. The government uses a procedure called "garnishment" when someone owes unpaid taxes or unpaid child support. First, they send you a bill for the money that you owe. You can pay the bill outright, or you can set up an installment plan to pay it. If you don't, the government has the right to garnish your wages. That is, they will take a percentage of every paycheck you receive, until the debt is paid. In more extreme cases, they work with your bank and get money straight from your account. In the most extreme cases, they seize your assets and sell them to settle the debt.

Tax evasion is a crime. The statute of limitations changes, depending on the particulars of the crime. As a general rule of thumb, the limit is three years. If the case involves a large amount of unreported taxes, then the limit is six years. If the case involves tax fraud, there is no statute of limitations at all. The IRS can prosecute you for tax fraud, even if it happened a hundred years ago. So make sure to pay your taxes!


Elizabeth Riepenhoff said...

Thank you for responding to my question!

Anonymous said...

why do some people go to prison for tax evasion, instead of just garnering their wages / having them pay it back. I am thinking of the actor Wesley Snipes, who said it was the accountant he hired and trusted.