The Role of Accountants in Minimising Tax Bills - Case Study Example

THE ROLE OF ACCOUNTANT IN MINIMISING TAX BILLS and \ The Role of Accountant in Minimising Tax Bills Introduction This paper seeks to compare the pros and cons of the heading of the essay. It carefully and critically looks at the two scenarios in a bid to bring out the fact that the accountant’s main role to have been to minimise tax bills for companies and rich individuals and consequently providing very little positive value for society. Both sides are first elucidated in the paragraphs below, and a conclusion is ultimately drawn in an analytical manner. To start with the positive side, the accountant’s main role to have not been to minimise tax bills for companies and rich individuals but to provide very crucial value for the society. The accountants have the professional capability of aiding individuals in minimising taxes in their premises. This is because they want to boost their reputation in a bid to acquire more clients from the many referrals they get. The result is appraisal from individual with a vested interest in the company whose tax is manipulated (Sims, 2011, P.24). In order to achieve this, accountants employ various strategies such as assets transfer to limited partnerships, the creation of trusts and use of gifts. Some of these strategies have been critically considered in the paragraphs that follow. Creation of Trusts This is a simple but one of the most effective ways of minimising taxes in a given firm. Through the advice of a company accountant, many individuals devise a planning strategy that is multigenerational by hiding behind trusts. According to Sims (2011), the idea is to create specialised forms of trusts that by their definition enjoy the benefits accruing due to inheritance tax exemption. Similarly, estate taxes are commensurably reduced in wealthy families. Another strategy under this is income shielding from taxes. In addition to this, accountants use trusts in barring recipients from expenditures that are deemed to be imprudent in nature. They can also prevent the recipients from undertaking different legal actions that have adverse effects like creditor claims, divorce and related lawsuits. There are several types of trusts that can be used by accountants to achieve this. Some of them are elucidated in the subsequent paragraphs below. Grantor Trusts These kinds of trusts are used in many cases for the purposes of income tax. Under this type of trust, benefactors have the option of transferring large sums of money and accrued wealth to their respective beneficiaries. It has a benefit of avoidance of two types of taxes namely, estate and gift taxes (Sinclair & Lipkin, 2012 p.31). In addition, this type of trust can be set up such that income stream can flow to the beneficiaries from the trust. That way, a faster pace of growth of trust assets can be realised alongside the remarkable reduction of client’s estate. Directed Trusts In this kind of trust, the investment management and trust administration duties are isolated and independent. It is possible to achieve this by the designation of an accountant to manage clients money intelligently whereas the respective lawyer handles the trust administration. Revocable Trusts Under this arrangement, infirm and sometimes elderly clients create a living trust that is revocable in the future. The idea is to solve the problem of anticipated inability to undertake future transactions at old age. Consequently, the trustee takes the prior initiative of naming an independent individual as a potential successor. This provides an exit plan in the event of incompetence or mental incapacitation of the trustee. Gifts Gifts that are by their nature not taxable can be employed as a strategy to significantly reduce as estate’s size and by extension, the associated taxes. This strategy is commonly used by seniors whose resources are sufficient or whose money is big enough to part with (Whiteley, 2000, p.14). Some of the ways that can be used in order to achieve this include payment of medical expenses, tuition fee payment for relatives and children. Under such undertaking, the payments are stipulated to be directly made to the provider. Real Estate Gifts Another approach to tax reduction is the issuance of gifts in real estate whose interest is non-controlling in nature. In this arrangement, recipients do not have the power to sell the product directly even though they can begin a partition action that can lead to the property sale. Gifts Provided To Family-Based Limited Partnerships Under this arrangement, an interest of not more than two million can be transferred to a family based limited partnership. If empirically the interest of the partnership net worth is found out to be more than the IRS audit value, then the transferred portion will not go beyond two million. Marriage-Based Trust Gifts and Loan Forgiveness This arrangement works well in a scenario where loans are interfamily in nature. It is one of the quickest ways to execute a valuable gift requiring no transfer of money generation of new accounts. According to Whiteley (2000), individuals can illustrate the cancelation or forgiveness of a loan in writing or by signing a formal document that is notarized. In contrast to the aforementioned accrued benefits, the accountant’s main role to have been to minimise tax bills for companies and rich individuals and consequently providing very little positive value for society. There are various ways through which an accountant of a company can minimise the taxes of the organization he or she is working with as will be seen in the next couple of paragraphs. Premature revenue recording or recording of revenue of questionable quality An accountant who wants to cover the firm or individual can record all the revenue of the company before undertaking to complete all the required services. This is a strategy to evade paying the entire tax. Additionally, the accountant can choose to undertake to record revenue before the products are shipped or record commodities that do not need to be bought. Fictitious revenue recording In many circumstances, accountants can shrewdly purpose to record revenue for virtual and fictitious and, therefore, did not take place. Sometimes the accountant can treat investment as revenue when recording or treat received proceeds realised as a loan as if it is revenue (Schalkwyk, 2001, p.47). This is a strategy to evade the tax that consequently affects the society negatively. Raising income using one-time gains This is a smart strategy whereby the accountant increases the profits accrued to a firm by selling assets and instead of making a legitimate entry, treats such profits as though they are revenue. The same can be achieved by raising the profit realised through classification of gains and investment income as revenue. Moving current expenditure to later or earlier date A sly accountant can decide to slowly but gradually amortise costs or to change the standards of accounting with the aim of fostering manipulation. They can also reduce the expenses through capitalisation of ordinary operating costs by transferring them to the balance sheet from the income statement (Palmer, 2013, p.56). Some more intelligent accountants can deliberately ignore to write off or write down impaired assets. Failure to appropriately record or reduce liabilities This entails fostering manipulation by changing the assumptions considered during accounting process. Sometimes an accountant may deliberately opt not to consider liabilities or expenses in the process of computation. Conclusion In conclusion, it is evident that the negative side far outweigh the positive side. This means that the accountant’s main role is to minimise tax bills for companies and rich individuals and consequently provide very little positive value for society. This is in contrast to the belief that people hold regarding accountants that accountants are trustworthy in disclosing all and sundry information. ReferencesTop of FormBottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Bottom of Form Palmer, G 2013, ‘Compromise of tax debts : tax collection’,Tax Breaks Newsletter.2-3. Sims, S 2011, Understanding and Paying Less Property Tax for Dummies, UK Edition, Wiley, Hoboken. Sinclair, W I, & Lipkin, B 2012, St. Jamess Place tax guide 2012-2013, Palgrave Macmillan, Basingstoke. Whiteley, J 2000, Coping with self-assessment: how to complete your tax return and minimise your tax bill, How To Books, Oxford. Bottom of Form Read More