notes_introduction - 1 TAX 6845 Tax Planning &...

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1 TAX 6845 – Tax Planning & Consulting (August 30) Topic: General overview of tax planning updated: August 15, 2011 I. Tax planning overview: A. Possible goals of tax planning 1. Is it to reduce or minimize taxes? Having no job and owning no property would minimize taxes. Always investing in tax-exempt bonds may not be best answer. 2. Is it to maximize after-tax income? Or maximize the present value of after-tax cash flows? That would mean you should work 100 hours per week and not retire until you are too feeble to work. C. Is it to maximize an individual's well being or utility as some economists might say? That would help explain charitable contributions, gifts to family members, early retirement, vacations, and even marriage and having children. D. Is it to maximize society's or the world's well being? Is there some social responsibility? Although a CPA's responsibility is to be an advocate for their client, professional ethics limit how far CPAs can go in achieving that objective. They do not have the luxury afforded other consultants of adopting the attitude that “the client is always right”. Tax professionals must meet the ethical standards of their profession when recommending tax return positions to clients. In addition, they must also comply with statutory standards (Sec. 6694) to avoid tax preparer penalties. B. In general terms, the ultimate goal of tax planning is to optimize taxes & cash flows rather than to simply minimize taxes. 1. This involves structuring business, investment, and personal transactions to reduce tax costs or increase tax savings in order to maximize the net present value of the transaction. 2. In other words, the goal of tax planning is to maximize after-tax wealth and cash flows; which is not always the same as minimizing taxes. 3. Tax planning must also recognize the conflicts between tax and nontax factors.
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2 C. Some factors to consider in tax planning: 1. Taxpayers do not engage in unilateral transactions, thus tax professionals must consider all parties and entities involved. Most transactions involve three parties – the taxpayer, the other transacting party, and the uninvited silent party – the government. Often the client’s "ideal" solution is impractical because it is so one-sided. Or because the tax position can’t be substantiated by the proper authority which includes: the Internal Revenue Code, the Regulations & other administrative sources of tax law, and Court cases. Note: Tax authority comes from all three branches of government – legislative, executive, and judicial. 2. Taxes are just one cost of doing business, therefore you must consider nontax factors too – the cost of doing business (cost of raw materials, labor, and energy), access to a skilled workforce, suitable infrastructure and transportation centers, the regulatory and legal environment, and the standard of living (e.g., the perceived “quality of life”). Managers must also focus on increasing sales, improving product quality, and producing goods & providing services more efficiently.
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notes_introduction - 1 TAX 6845 Tax Planning &...

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