Do you feel like you want to cheat on your taxes? There are other legal ways to retain your hard earned income rather than hiding from the I.R.S.

Posted on October 15, 2008 by Bill Faiferlick

According to a September 12, 2008 study titled” The Distribution of Income Tax Noncompliance” on a sample of 45,000 individual returns filed for 2001, 21% of Americans earning between $500,000 to $1,000,000 understated their gross income in 2001. This is contrasted with the underreporting rate for those earning $50,000 to $100,000 at 8% and lower for those earning less. The super-wealthy, those earning $2 million or more of income had an underreporting rate of 11% which is less than half for the $1 million dollar club. The study was researched by Joel Slemrod, an economics professor at the University of Michigan’s school of business and IRS economist, Andrew Johns.

The compliance for the $500,000 or less cohort is more likely than not, attributable to W-2 income which is easy to report and find. Wealthy individuals, on the other hand, do not receive the majority their income from W-2 type salaries. Their income is derived from their businesses, holding companies, S-corporations, partnerships, rental income and other sources. The study attributes some of this effect to good tax attorneys. (I’d be cautious of the recently enacted Small Business and Work Opportunity Act of 2007 which could drastically modify the exemptions and tax deductions available as tax preparers are now liable for the penalties for under-reported taxes).

There are opportunities for business owners, professional and affluent individuals in this tax bracket and higher to take advantage of many legal tax deferral and wealth accumulation strategies. Business owners and professionals can install benefit plans for themselves and their employees on a tax deductible basis as high as $350,000 annually. This not only provides tax deductions, but also pre-funds certain customary business benefits like vacation pay, sick benefits, medical benefits and a range of other benefits. Additionally, business owners, professionals and affluent individuals with W-2 type incomes of $280,000 or more may qualify for variations of different carve-out pension plans with contributions which can legally exceed the reported income completely wiping out all liabilities.

So if the burden of paying taxes is getting you down, maybe you should see what other legal financial strategies are available to reduce your tax burden and keep the IRS auditors at bay.