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Taxes: Are You Crossing the Line?

Know your tolerance for risk vs. reward before you claim questionable deductions.
April 13, 2010
URL: http://www.entrepreneur.com/article/205986

How aggressive do you get this time of year when final payments are due for your annual income tax returns? The benefit of lowering your effective tax rate to save money is very compelling. However, the consequences of the tax authorities swooping in to discredit (and even prosecute) questionable items can be quite severe.

Even those of you who (once again) plan this year to file extensions to postpone the finality of filing your tax returns cannot escape the inevitable. Your body being more susceptible to colds, flu and migraine headaches this time of year may be its own way to alert the brain you are crossing the line with your taxes.

Nowadays, the process of filing tax returns online makes the actual signing where you attest to the accuracy of each filing feel less eventful. But do not kid yourself: The magnitude of placing your own "John Hancock" on these documents is the trigger to your own smoking gun. You will be held responsible to the letter of the law for its contents regardless of who assisted in preparing those forms. There is good reason why tax authorities require all applicable parties to sign in ink.

Life is filled with similar dilemmas where a decision (or inaction) could produce a very positive or extremely negative outcome. Everyone has a different tolerance for risk vs. reward. Having a keener sense of where you stand and what could eventually end up on your personal life map is paramount to effective risk vs. reward management.

The essence of this particular dilemma lies in answering this initial question: Even if the upside appears to be a sure thing, can you afford to accept your fate in the event that the worse-case scenario of a life decision implodes on you? In other words: If you can't do the time, then don't do the crime in the first place.

You will not be the first (or last) person to think you will luckily escape drawing the short stick in being put to the test via a tax audit. All too often, you can lull yourself into thinking the ritual of doing your taxes is more than what it is. After all, it is expected that every law-abiding citizen will complete an accurate tax return each year. But somehow people lose proper perspective and in the process also lose their own purpose in life.

Rationalizing that the questionable deductions you took in prior years were not (yet) detected does not mean you are in the clear. Believe me, as a former practicing CPA, when the IRS starts sending notices, it is already too late. And pleading ignorance by hiding behind the credentials of your so called tax expert will provide little consolation.

And to think this likely all started years ago when you took an inconsequential deduction for something on the scale of a charitable donation you did not really make. Everybody does it, right? The irony of it all--it often starts with a good cause in mind.

The thing that very few realize is that tax troubles may be the catalyst for additional collateral damage that often follows in the aftermath. Once the news of your tax evasion appears on the web, millions will know about it. Years of accomplishments in your esteemed professional and personal life can be extinguished overnight.

It could literally steamroll over you. Greed gets disguised as denial that it is something different or someone else's fault. Accept and embrace the full responsibility of understanding your own tax situation. It is only then you can truly appreciate and benefit from the powers of applying effective risk vs. reward management in your own life. Plus, maybe those headaches and sleepless nights will subside when tax day comes and goes each year.

Remember, no matter how substantial and apparently easy to reach the upside seems to be, do not journey there. You must bypass such shortcuts. My advice is that prior to signing in ink, review those tax returns one last time with this refined risk vs. reward approach to plot your best destination.