When Is It Cheating On Taxes

Q1. My brothers and I inherited a business from our father. They want to save taxes through a complex scheme involving an offshore tax haven. Is this ethical? 

Q2. As a CPA, I encounter many people who ask me to be as creative as possible in helping them reduce their tax liability. They tell me that they pay too much in taxes already. Should I tell them that if I were truly creative I would be an artist or an actor and thus lose the client to an eager competitor, or may I interpret the law in a completely new light?

A. Your confusion is understandable. No less a genius than Albert Einstein is quoted as admitting that "The hardest thing to understand in the world is the income tax."

The basic distinction to be made is between "tax avoidance" and "tax evasion," between exploiting the law and flouting it. It’s okay to minimize taxes by taking advantage of legitimate provisions of the tax law, or even taking a reasonable position on an unresolved question of law. But we cross the line into tax evasion, which is a criminal activity, when there’s no sincere claim of lawfulness.

A good way for the average person to distinguish between a prudent plan to save money and an illegal and immoral scam - which may ultimately be extremely expensive - is to ask a reputable tax adviser. If this professional openly advises that you needn’t declare sheltered income, he or she probably believes your acts are solidly defensible. But an evasive answer such as "Nothing will happen to you if you don’t report," or "I know that many people employ these methods," is a sign of danger.

Another guide is the degree of secrecy called for. Watch out when ordinary, prudent discretion crosses the line into "cloak and dagger" activities like wiring small amounts repeatedly, moving cash or using way stations in moving money, etc.

An ordinary person can rely on a reputable accountant, but the accountants themselves can’t just pass the buck. They have to answer to a higher authority – not to mention the Higher Authority. Their obligation to know and conform to generally accepted accounting procedures is legal, ethical, and professional. An accountant who deviates from these principles can be prosecuted, is acting in a devious way, and violates the professional code of conduct of his or her professional association.

Of course an accountant, like a lawyer or a judge, may interpret the law in a completely new light – if the interpretation is professional and defensible. But it is unethical to make an audacious claim based on the hope that the tax authorities won’t notice.

I wouldn’t worry too much about your competition. Plenty of taxpayers are turned off by an accountant who likes to play games. The average person wants to be on the level, and also knows that an accountant who takes chances puts all of his or her clients in danger of audit.

SOURCES: Shulchan Aruch, Choshen Mishpat, 369:6; Shulchan Arukh HaRav, Laws of Theft, 15.