Having worked with clients being audited by the IRS, I’ve seen their initial bravado—Who’s going to know if we just…—quickly evaporate under scrutiny. One client remained oblivious to the risks of an audit, even after one had begun. That changed the day my tax partner and I walked with him to the federal courthouse to meet with a government lawyer flown in from Washington, D.C. Suddenly, it felt very real.
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In business, opportunities to minimize taxes—whether intentionally or absentmindedly—are everywhere. At one end of the spectrum, it’s as small as grabbing a roll of office toilet paper for home. At the other, the possibilities are limited only by imagination and tolerance for IRS risk.
CAUTION – DANGEROUS SLOPE AHEAD!
No matter where one falls on that spectrum, brazen tax fraud is a dangerous game. It’s one thing to misclassify an expense instead of capitalizing it for depreciation; it’s another to fail to report income or take fraudulent deductions. The IRS, though understaffed and currently under pressure, still makes public high-profile enforcement cases. These serve as cautionary tales.
CEOs, CFOs, boards of directors, shareholders, and the market all create immense pressure to meet expectations. The urge to rationalize aggressive corporate tax strategies and reduce tax liability can be strong. Small business owners also feel the weight of financial pressures, and can become frustrated by taxes eating into their earnings. Starting with toilet paper, we can become quite creative in tax avoidance, which might cross the line someday.
Accounting and legal tax advisors help businesses distinguish between tax avoidance and tax fraud—whether through complex tax-saving investments, real estate deals, high-dollar life insurance programs, or financial reporting tactics. Keeping the possibility of an IRS audit in mind—however unlikely—can encourage us to pay heed to those advisors, helping us avoid that slippery slope.
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Plus, most of us sleep better knowing we’re on the safe side of the law.
