Lately we’ve heard plenty of discussion about tax law. It seems especially common right now when tax terms have come up multiple times in casual conversation this past week at coffee, family dinner and email from a client. In some cases the terms are misused or misunderstood. Like many types of discussion, meaningful communication depends on clear and precise understanding of the use of terminology. This post is meant to highlight distinctions between key terms.
Tax law is a collection of authorities ranked in order of hierarchy. The takeaway is that there is no one single comprehensive source of federal tax law.
Tax avoidance is the legal method of following a strategy that avoids triggering a tax obligation. This is often the goal of tax planning. The tax avoidance strategies used by the ultra-wealthy are different from the tax avoidance strategies used by the majority of working-class people summarized in this blog post.
A tax protester is a person who claims that payment of taxes is not necessary1. These arguments fall into one of seven categories. The IRS has an almost 100% conviction rate against tax protestors (although apparently that won’t deter the enthusiasm of the believers who read about it on Facebook). Wikipedia provides useful summary information to prevent us from being dragged in and rehashing the topic.
Tax evasion is the illegal act of not paying taxes due, typically used to refer to the act of filing tax returns with false information.
A tax resister is a person who won’t pay taxes as a protest against the government or its policies2. We saw a big wave of increase in these tax resister people during the Vietnam war and now in response to president Trump. I covered this political topic in other blog posts.
Tax obligation is the term conceptualizing the amount of tax you owe. However, it is understood that this is not a single concrete number. Tax obligation is calculated differently and the IRS understands, based on prior experimentation, that most tax professionals calculate a taxpayer’s obligation differently than the service would prefer. Widely published experiment results show that six randomly chosen CPAs given the same data set will calculate the tax obligation six different amounts. As a result, the service is likely to accept more than one number as the tax obligation of a taxpayer.
Tax planning is the process of attempting to minimize tax obligation through legal strategies. The validity of tax planning as a financial planning tool is well established.
In the coming months the Tax Cuts and Jobs Act is expected to trigger the launch of tax reducing strategies for affluent taxpayers. I forecast a rebirth of the tax shelter industry that existed in the 1980s as discussed in this Brookings Institute article. My own focus will be on ho middle income taxpayers can best minimize their tax obligations under the new tax law.
1 “Any assertion that the payment of income taxes is voluntary is without merit. It is without question that the payment of income taxes is not voluntary. United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993), (per curiam); Wilcox v. Commissioner of Internal Revenue, 848 F.2d 1007, 1008 (9th Cir. 1988). The assertion that the filing of an income tax return is voluntary is, likewise, frivolous. Title 26, United States Code, Section 6012(a)(1)(A), ‘requires that every individual who earns a threshold level of income must file a tax return.’ United States v. Pottorf, 769 F.Supp. 1176, 1183 (D.Kan. 1991). Failure to file an income tax return subjects an individual to criminal penalty. Id., (citing 26 U.S.C. § 7203).” United States v. Hartman, 915 F.Supp. 1227 (M.D.Fla. 1996)
2 Earlier court cases have used the terms ‘tax protester’ and ‘tax resister’ differently than we use the terms today.