When You Should Not Take Advantage of a Tax “Loophole”
Most of us think of a tax loophole as a gift from the IRS. A tax loophole is actually an exploitation of a current tax law which allows the taxpayer to reduce or even eliminate taxes owed. A prime example of a tax loophole is the substantial tax break which was offered several years ago to small businesses that purchased SUVs for their business transportation needs. This particular tax law allowed 50% use of the vehicles to be for personal use. Many small business owners took this opportunity to upgrade their personal vehicle to receive this tax credit, thus exploiting the way the law is written for personal gain.
It is a sure bet that few legislators would define changes to the tax code as a loophole yet once the new law goes into effect, experts in tax laws may be able to discover flaws in the wording which allow taxpayers to get an unintended break. In some instances this type of loophole could be reported to lawmakers and the law re-written, however other loopholes could exist for years until finally discovered. Consider the tax known as the marriage penalty which caused married couples to pay more taxes than unmarried couples with the same income. Some couples decided to get a quickie divorce in a foreign country prior to the last day of the year, remarrying (legally) when January 1st rolled around. This is an obvious tax loophole which writers of the tax code simply never anticipated.
More Unexpected Tax Loopholes
Lest you be under the impression that tax loopholes are not a huge issue, consider the fact that between 2008 and 2010 a significant number of the Fortune 500 companies paid more for lobbyists than they paid in taxes in order to lodge themselves firmly in the pocket of Congress and, in effect buy the tax breaks and loopholes which would benefit their company. Not only did some 30 of these firms make billions in profits, they also avoided paying taxes and received over $10 billion in rebates. These, of course, are the blatantly obvious tax loopholes, yet there are hundreds more taken advantage of each and every year when tax season rolls around.
The Risks of Taking Advantage of Tax Loopholes
Be aware that engaging in tax loopholes can be a potentially risky business. Simply because the tax laws are laborious and, in many cases, ambiguous, is no excuse for skating out on the thin ice of a tax loophole, particularly one you are well aware was not meant to be used in the way you are anticipating. Should your tax returns be randomly selected for an audit, you may wish you had avoided that loophole altogether when you are forced to explain it to the IRS.
Even though you may attempt to justify using a tax loophole to your advantage, the reality is that should you get caught, you could end up paying back taxes as well as penalties and interest for doing something you knew you should have avoided. If you are uncertain whether a particular tax law could help you out—legitimately—talk to a tax professional If you find yourself in trouble with the IRS because you have indulged in tax loopholes in the past, find a knowledgeable tax attorney as soon as possible.