Effective Tax Management

Chapter 4

Distinction between Tax

Evasion and Tax
Avoidance
Tax 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 Cases

Off shore accounts fraud

Corporate tax fraud
Employment tax fraud
Money laundering tax fraud
Abusive tax shelters

Off shore accounts fraud

Individuals and corporations will useoffshore 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 fraud

A 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 fraud

Common 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 fraud

Money 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 shelters

A 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 Management

Making 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 Avoidance

1. Tax Option Taxpayers my choose to pay lower
tax rate in some transactions as permitted by Tax
Laws.
2. Shifting The transfer of tax burden to another;
the imposition of tax is transferred from the
statutory taxpayer to another without violating the
law.
3. Transformation The producer absorbs the
payment of tax to reduce prices and to maintain
market share.
4. Exemption denotes a grant of immunity,
expressed or implied, to a particular person,

Classifications of Tax Exemption

1. Expressed exemption exemptions that are
statutory laws in nature as provided by
constitutions, statute, treaties, ordinances,
franchises or similar legislative acts.

2. Implied exemption or by omission

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

3. Contractual exemption lawfully entered

into by the government in contracts under existing

Filing of Returns
Tax 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.

Filing of Returns
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.

Mandatory 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
WitheFPS, taxpayers can avail of a paperless tax filing
through
internet.
experiencethe
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,

Maintenance, Retention and

Submission of Electronic Records
A 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

Business Process Information

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.