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Effective Tax ManagementChapter 4Distinction between Tax Evasion and Tax AvoidanceTax evasion is the illegal practice of not paying taxes, by not reporting income, reporting expenses not legally allowed, or by not paying taxes owed.

Tax avoidance is the legal usage of thetaxregime to one's own advantage, and generally the detriment of society, to reduce the amount oftaxthat is payable by means that are within the law.

Types of Tax Fraud CasesOff shore accounts fraudCorporate tax fraudEmployment tax fraudMoney laundering tax fraudAbusive tax sheltersOff shore accounts fraudIndividuals and corporations will useoff-shore accountsto illegally hide income streams and assets from the government in an effort to avoid taxation. Many foreign jurisdictions offer financial secrecy to attract investors that live in other countries. These jurisdictions are considered "tax havens" due to the fact that they provide financial secrecy and require little or no taxation of income earned outside their jurisdiction.Corporate tax fraudA corporation is generally held liable in a criminal case when the fraudulent acts are committed in an official capacity, are to the benefit of the corporation, and are authorized by the corporation.

However, in many cases, a corporation as a whole will not be held accountable for the actions of an individual corporate agent. If the corporation was the innocent victim of unauthorized activities by a shareholder or employee and these actions went against the interests of the corporation, it will generally not be found guilty of tax fraud.Employment tax fraudCommon employment tax fraud schemes include:

Pyramiding A business withholds taxes from its employees but intentionally fails to pay them to the IRS. As these quarterly tax withholdings accumulate, or pyramid, it becomes increasingly difficult for the employer to catch up on back taxes, often resulting in bankruptcy.

Unreliable third party payers This scheme generally involves either payroll service providers or professional employer organizations who fail to pay collected employment taxes to the IRS. Misclassifying worker status An employer incorrectly treats an employee as an independent contractor to avoid paying employment taxes.

Cash payments Employers often pay employees in cash to avoid reporting the income and paying the appropriate employment taxes.

Payroll tax return schemes An employer files false payroll tax returns or fails to file payroll tax returns altogether. Frivolous arguments Employers may use a variety of false or misleading arguments to avoid paying employment taxes. Many of these schemes are based on manipulating Section 861 of the tax law.

Off-shore employee leasing A taxpayer resigns from his current employment position and signs an employment contract with an off-shore employee leasing company, who indirectly leases his services back to his original employer. The employee performs the same services before and after entering into the leasing agreement and generally receives the same payment for his services. However, his salary is sentoff-shoreas deferred compensation, where employment and income taxes are potentially avoided.Money laundering tax fraudMoney laundering is typically performed to hide the true source of money, particularly when it is earned from illegal activities. By laundering the money, it gains the appearance of coming from a legitimate source.Abusive tax sheltersA tax shelter is an investment that allows you to reduce your tax liability. Examples include investments in pension plans and real estate.

When tax shelters are designed solely for the purpose of avoiding taxes, they may be deemed abusive by the IRS. Taxpayers who useabusive tax sheltersmay facecivil and criminal penalties.Objectives of Tax ManagementMaking sure that the management of the tax administration has in place the necessary structures and functions which will satisfy the public's expectations with regards to its interactions with the Revenue Services. Invariably, the process of reform will require fundamental behavioral change in the way the tax official work with taxpayers and with each other and will usually take a long time. However, it is important that these changes be carried out if the country is to attain the level of performance in tax administration that is required to compete in a globalized and extremely competitive economy.Forms of Tax AvoidanceTax Option Taxpayers my choose to pay lower tax rate in some transactions as permitted by Tax Laws.Shifting The transfer of tax burden to another; the imposition of tax is transferred from the statutory taxpayer to another without violating the law.Transformation The producer absorbs the payment of tax to reduce prices and to maintain market share.Exemption denotes a grant of immunity, expressed or implied, to a particular person, corporation, or to persons or corporations of a particular class, from a tax upon property or on excise which persons and corporation generally within the same taxing district are obliged to pay.Classifications of Tax ExemptionExpressed exemption exemptions that are statutory laws in nature as provided by constitutions, statute, treaties, ordinances, franchises or similar legislative acts.

Implied exemption or by omission occur when tax is imposed on a certain class of persons, properties or transactions without mentioning other classes.

Contractual exemption lawfully entered into by the government in contracts under existing laws.Filing of ReturnsTax Returns

The tax form or forms used to file income taxes with the BIR. Tax returns often are set up in a worksheet format, where the income figures used to calculate the tax liability are written into the documents themselves. Tax returns must be filed every year for an individual or business that received income during the year, whether through regular income (wages), interest, dividends, capital gains, or other profits.Every person who is required to register with the BIR shall file a return and pay such taxes for each type of internal revenue tax for which he is obliged.

Any person registered in accordance with Sec. 236 of NIRC shall, whenever applicable, update his registration information with the Revenue District Office where he is registered, specifying therein any change in tax type and other taxpayer details.Filing of ReturnsMandatory Enrollment to and Availment of the Electronic Filing and Payment System Facility (eFPSF)Electronic Filing and Payment System (eFPSF)

It refers to the system developed and maintained by the Bureau of Internal Revenue (BIR) for electronically filing tax returns, including attachments, if any, and paying taxes due thereon, specifically through the internet.WitheFPS, taxpayers can avail of a paperless tax filing experience and can also pay their taxes online through the convenience of an internet-banking service via debit from their enrolled bank account. In addition, sinceeFPSis available on the Internet, taxpayers can file and pay for their taxes anytime, anywhere as long as he or she is using a computer with an internet connection.Maintenance, Retention and Submission of Electronic RecordsA taxpayer shall maintain all records that are necessary for the determination of the correct tax liability under Section 232 of the NIRC.

Make the records available in electronic format; (Sub-sec. 3.2)

Not prohibited to demonstrate tax compliance using traditional hard-copy documents or reproductions thereof, in whole or in part but does not relieve to comply with Sub-sec 3.2 of this regulations.computer hardware or software shall accommodate the extraction and conversion of retained electronic records in accordance with Revenue Regulations No. 16-2006.

Records that are retained by copying or backing up the data to another medium must be done so in accordance with the media manufacturers suggested procedures with particular attention given to the suggested shelf life of the medium.

The taxpayers responsibility to ensure that current and/or prior period data files have been archived or backed up properly Provide a description of the business process that created the retained records.

The taxpayer shall be capable of demonstrating the functions being performed as they relate to- the flow of data through the system;- the internal controls used to ensure accurate and reliable processing;- the internal controls used to prevent unauthorized addition, alteration, or deletion of retained records.

Business Process Information