#AskTheTaxWhiz: What's the difference between tax avoidance and tax evasion?
Dear Mr Tax Whiz,
I have inherited our family business since my siblings are all professionals working abroad and I am the only one left here to manage it.
After two years operating it, we found out that our outsourced bookkeeper had been doing "hocus pocus" in our books of accounts and that the Bureau of Internal Revenue (BIR) examiners auditing us every year are the godparents of his children. What a coincidence, right?
We conducted an investigation and found him guilty. With the approval of my parents, we terminated his services immediately. Weeks later, we received a mission order from BIR for a surveillance in our warehouse. Was this another coincidence?
A series of problem with BIR arose. We hired a tax lawyer but he seems “wishy-washy” and too reluctant in handling our case. He is even proposing to just bribe the BIR examiners. We are seriously considering the proposal but before we make another big mistake we wanted to consult it with you since you are advocating honest tax payments as part of pushing for genuine tax reform in our country.
Here are the BIR issues we are facing right now:
- We donated P1 million to the victims of Super Typhoon Haiyan (Yolanda) through my cousin who's an incumbent local official in one of the affected areas. But the BIR examiners disallowed it and charged us penalty for over-declaring our deductible expenses. How do we argue with BIR examiners if they're harassing us already to pay the assessment?
- Our former bookkeeper who was not a Certified Public Accountant (CPA) negligently complied with BIR for one of our branches in Tacloban and asked someone else to sign our audited financial statements (AFS). However, we tried contacting the auditor who signed our AFS but to no avail. Can we still claim losses due to typhoon?
- Our tax lawyer warned us that if we do not settle right away with the BIR we can be charged tax evasion. He said he knows the Revenue District Officer (RDO).
But our former bookkeeper said that it wasn't tax evasion but tax avoidance. What's the difference between tax evasion and tax avoidance? Given the more than 357 tax evasion cases filed by BIR, I am honestly doubtful if tax avoidance is even possible. Where can I learn more about this?
I will really appreciate your answers to my tax questions. I have been depressed and sickly since the start of our BIR problems. The BIR examiners are calling us almost every other day, harassing us to pay the assessment to avoid being charged a tax evasion case.
DeTax (Desperate Taxpayer; name withheld)
I am sorry for your loss and the unfortunate experience with your bookkeeper. It is for this reason that we encourage every business or company to invest in hiring good accountant – as much as possible, on a full-time basis.
At the start, it may seem costly but as I have been advocating, it will prove to be a good investment later on rather than outsourcing bookkeepers who are not even certified public accountants (CPAs). In trying to cut your cost, you end up getting fixers and worse, accumulating BIR problems which become more costly later on.
To answer your tax questions:
- BIR harassment sometimes becomes a scapegoat for those who refuse to understand their tax problem. Although I know some BIR examiners who can really be very demanding and evil, but BIR harassing you to pay the assessment may be unfounded. First, you need to support your donation as charitable contributions to an accredited NGO or government agency to claim it in full as deductible expense. Otherwise, BIR imposes a threshold or ceiling of 5% (for corporations) and 10% (for individuals) of the annual gross receipts or revenues to be claimed as deductible donations. In your case, you need to secure certificate of donation from the local government office which your cousin represents to support your donation.
- Hiring a non-CPA is water under the bridge. You have to stop blaming your former bookkeeper who may not have claimed to be CPA. You should have learned your lesson by now. You have to deal with professionals and have a reasonable budget to hire an external auditor whom you know and trust. To claim casualty loss as a deductible expense, you need to notify the revenue district office (RDO) where the concerned office or branch is registered and comply with the policies and guidelines provided in Revenue Memorandum Order 31-2009 on reporting casualty losses. However, you should have filed within 45 days from the date of the event or typhoon, in your case.
- Your tax lawyer claiming to know the RDO is irrelevant. If you do not have the supporting documents, you will only end up bribing BIR officials. And if that is what your tax lawyer suggests from the onset, I suggest you look for a more honest and credible tax consultant.
Tax avoidance, as it is technically called, is the attempt to minimize tax liabilities by lawful means. Tax evasion, meanwhile, is the use of illegal or fraudulent means to defeat or lessen tax payment.
If you will have time, I would like to invite you to the 2015 Tax Avoidance Congress (TAC) in Baguio on May 23, 2015. This is the biggest and most-anticipated gathering for business owners and professionals who want to learn the art of paying less taxes. In this event, tax experts from the public and private sectors join forces to share tips and tricks on how to ease the burden of taxation without violating the law.
TAC is officially part of the regional tax roadshow endorsed by Senator Bam Aquino to promote tax awareness among small and medium enterprises (SMEs). Register now and learn how to enjoy a tax-free lifestyle through the Citizen Tax Planning (CTP) Certification Program. For details, visit their website.
In the end, you have to help yourself and get professional assistance if needed. BIR examiners cannot harass you if you have complied with all tax regulations.
Why don't you drop by our office, let's talk? Call (+63 2) 6227720 for an appointment.
Mr Tax Whiz
Mon Abrea is a former BIR examiner and an advocate of genuine tax reform. He serves as chief strategy officer of the country’s first social consulting enterprise, the Abrea Consulting Group, which offers strategic finance and tax advisory services to businesses and professionals. Mon's tax handbook, Got a Question About Taxes? Ask the Tax Whiz! is now available in bookstores nationwide. Follow Mon on Twitter: @askthetaxwhiz or visit his group’s Facebook page. You may also email him at firstname.lastname@example.org.
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