Why Aggressive Tax Strategies Make Business Owners Nervous
For a lot of business owners, the phrase aggressive tax strategies immediately raises concern.
It sounds like the kind of thing that gets flagged by the IRS. It sounds risky. It sounds like the line between smart planning and serious trouble might be razor thin.
That fear is real, but much of it comes from misunderstanding what actually creates legal exposure in tax planning. In the episode, Ed Lyon explains that people do not go to jail for simply using an aggressive tax strategy. They go to jail for fraud, lying, backdating documents, and making false statements. That is a very different issue.
That distinction matters because many business owners assume that paying less in tax must mean they are somehow cheating the government. But the tax code is full of incentives designed to encourage specific behavior. Lawmakers use tax policy to reward actions they want people and businesses to take.
So the real question is not whether a strategy feels aggressive. The real question is whether it is legitimate, supportable, and properly executed.
What Makes an Aggressive Tax Strategy Legal or Illegal?
The line between legal and illegal tax planning is not simply whether a strategy is creative.
A strategy can be advanced, unusual, or sit in a gray area and still be legal. What matters is whether it is grounded in the law, supported by the facts, and handled honestly. Ed points out that tax law contains many gray areas. In some situations, the IRS clearly allows a deduction. In others, the IRS has not explicitly prohibited it, which leaves room for interpretation and planning.
That does not make every gray area strategy abusive. It means the burden shifts to substantiation, documentation, and proper implementation.
The Augusta Rule is a good example. For years, it lived in a gray area for many taxpayers. Then the tax court addressed it in specific cases. In one case, the taxpayers failed because they did not document how they determined rental value and did not document the meetings themselves. In another, the deduction held up because the taxpayers had the right records and support. The issue was not that the strategy automatically failed. The issue was whether the taxpayers could substantiate what they claimed.
That is a useful framework for business owners. A strategy is not made legal by a good sales pitch. It becomes defensible when the law supports it, the facts match it, and the records back it up.
Where Aggressive Tax Strategies Cross the Line
The real danger starts when a strategy moves out of a gray area and into something the IRS has already identified as improper, misread, or fraudulent.
Ed gives examples of trust-based schemes pushed online and sold as if they are legitimate tax solutions. In one case, promoters argued that business income could be routed through special trusts to eliminate tax based on a distorted reading of the code. The IRS had already publicly addressed the position and explained why it did not work. That is no longer a matter of creative interpretation. That is moving toward a position the government already views as invalid.
He also describes another trust arrangement that attempted to turn personal living costs into deductible expenses through a chain of entities and charitable structures. His reaction was blunt. He viewed it as obvious fraud, and the IRS later pursued action against the people behind it.
This is where business owners need to be careful. The real red flags are not just that a strategy sounds complex. The red flags are things like false documentation, backdated paperwork, unsupported deductions, basis inflation, lack of economic substance, and structures that depend on secrecy instead of clarity.
In other words, the problem is rarely that a strategy is sophisticated. The problem is that it is fake, unsupported, or intentionally misleading.
How to Evaluate a Tax Strategy Before You Move Forward
One of the most useful parts of the episode is Ed’s explanation of how to do due diligence when someone presents an advanced tax strategy.
His first question is simple. Who is your counterparty? Who is the person or group you are doing business with, and are they reputable? He wants transparency. He wants to know what section of the tax code supposedly creates the opportunity. He wants to know what due diligence the sponsor has done, what the downsides are, and what could go wrong.
That is a strong filter for any business owner.
If someone is promoting a strategy but cannot clearly explain the code section behind it, that is a problem. If they only talk about upside and avoid the risks, that is a problem. If the structure is so convoluted that basic questions about counterparties, mechanics, or legal support cannot be answered, that is a problem.
Ed also makes the point that part of evaluating risk is recognizing the role of professional judgment. Some advisors are more cautious. Others are more proactive. A strategy one professional declines may be something another is comfortable with. That does not automatically make either one wrong. It means business owners need advisors who can walk them through the good, the bad, and the ugly, not simply sell certainty.
That is the standard. Transparency. Legal support. Full explanation of risk. Clear documentation. Honest judgment.
The Real Problem Is Not Tax Planning. It Is Bad Tax Planning
The main takeaway from this episode is not that business owners should avoid tax planning. It is that they need to stop confusing legitimate planning with fraud.
Tax risk is part of running a business, just like operational risk, customer risk, or hiring risk. It should be understood, evaluated, and managed, not treated like a mysterious area that only your preparer is allowed to think about. Ed makes the point that business owners need to understand their own risk tolerance and understand where their tax advisors fall on the spectrum from conservative to aggressive and from reactive to proactive.
He also points out that audit risk is often much lower than people assume. The bigger issue is not panic. It is education. If a serious business owner hears about an advanced strategy and immediately jumps to fears about prison, that usually says more about their misunderstanding of tax risk than the strategy itself.
That is why the real problem is not tax planning. It is bad tax planning.
Bad tax planning ignores the facts. It skips documentation. It relies on sloppy execution. It trusts promoters without asking hard questions. It treats complexity like proof. It confuses confidence with legal support.
Good tax planning does the opposite. It asks where the authority comes from. It documents the facts. It evaluates the downside. It understands the risk. And it makes sure the strategy can hold up if someone ever takes a closer look.
Frequently Asked Questions
What are aggressive tax strategies?
Aggressive tax strategies are advanced tax planning methods used to lower a tax bill. They often involve more complex interpretations of the tax code, which can bring more IRS scrutiny than standard deductions or basic planning.
Are aggressive tax strategies illegal?
Aggressive tax strategies are not automatically illegal. A tax strategy becomes a problem when it is not supported by the law, does not match the facts, or is implemented dishonestly.
Can aggressive tax strategies get you audited?
Aggressive tax strategies can increase audit risk in some cases, but audit risk does not mean a strategy is illegal. The key issue is whether the position is properly documented and legally supportable.
Can you go to jail for using aggressive tax strategies?
You do not go to jail for legal tax planning. Criminal issues usually come from fraud, false statements, backdated paperwork, fake transactions, or intentionally misleading the IRS.
What makes a tax strategy legal or illegal?
A tax strategy is legal when it is supported by the tax code, fits the taxpayer’s actual facts, and is properly documented and reported. It becomes illegal when it relies on fraud, sham transactions, false records, lack of economic substance, or positions the IRS has already rejected.
What is the difference between tax planning and tax fraud?
Tax planning uses legal strategies to reduce taxes. Tax fraud involves deception, such as hiding income, creating false deductions, or using fake documents to mislead the IRS.
Should business owners use aggressive tax strategies?
Business owners should not avoid aggressive tax strategies just because they sound risky. They should evaluate whether the strategy is legally supported, properly structured, and explained clearly by a qualified advisor.
What should you do before using an advanced tax strategy?
Before using an advanced tax strategy, review the legal authority behind it, understand the downside, make sure the facts support it, and consider getting a second opinion from a trusted tax professional.
Transcript: Are You Going to Jail for Tax Planning? Tax Attorney Sets the Record Straight
Mike: [00:00:00] Every business owner I talk to has thought this at least once. Is this legal or am I gonna end up in some IRS list? You hear phrases like aggressive tax strategy or audit, red flag, and suddenly saving money feels dangerous. Meanwhile, you’re watching other business owners legally cut their tax bills in half.
So what’s actually risky? What’s just misunderstood and how often does tax planning really turn into criminal charges? Today I’m joined by tax attorney Ed Lion to break down the truth about risk, what crosses the line, what doesn’t, and how to protect yourself while still playing, paying the least amount of taxes as legally possible.
Ed, welcome to the show.
Ed Lyon: Thanks for having me, Mike. I’m glad to be here and this is a great topic.
Mike: It’s really excited to [00:01:00] have you on here. I partially blame you for my tax planning madness. As you know, I’ve been connected with your program now for probably 12 or over 12 years.
Okay. And so here’s just a public thank you or not. Thank you for putting me down this route. But super happy to have you on and you’re, you’re somebody that I definitely look up to and, and really have learned a ton of from over the years.
Ed Lyon: Good. That means a lot to me.
Mike: So, ed, from your experience, where does this going to jail?
Fear actually come from, and I think this is an important topic now because we’re in the first half of the year, and it’s time for business owners to start ramping up or thinking about this idea of tax planning. And I want to kind of give them a little bit of a runway some of these fears that come with it as soon as they hear, like saving on taxes and doing these different things, you know.
First thing someone tell, tells me is like, oh, that person goes to jail, or, you know, for, for doing a tax strategy that’s out there. So where do you think that this kind of thought process comes from?
Ed Lyon: So, misinformation mostly and [00:02:00] the IRS practice of announcing tax prosecutions on the morning of April 15th, but mostly misinformation.
Nobody goes to jail for implementing a tax strategy. Even an aggressive. Tax strategy. People go to jail for fraud. People go to jail for lying. People go to jail for backdating documents. But when the IRS finds a strategy that it doesn’t believe is compliant, they will shut down the strategy. They’ll impose the tax and the usual interests and penalties, but their resources are so stretched.
That they’re not going to prosecute anyone unless they are truly defrauding the government. So. There’s a strategy that many people may be familiar with called a syndicated [00:03:00] conservation easement. About 10 years ago, these became very popular. They’re based on appraised values of real estate, and there’s a lot of room within a in, in an appraisal to be conservative or aggressive or abusive.
And they have found many abusive valuations. They have shut down those programs. Some people did go to jail. For conservation easements, but the people who went to jail for conservation easements were the ones who backdated documents and did things like that, made false statements on tax returns, that sort of stuff.
So what you’re really looking for is the line between and untested strategy and something that most people would recognize as fraud. So here’s a question for our viewers of this podcast. And you, you know the answer, but I’m gonna ask [00:04:00] viewers to, to stew on it. The IRS gets about 250 million tax returns a year.
That’s individual income taxes, corporate taxes, partnership taxes, payroll, nonprofits, all that kind of stuff. And the question is, how many prosecutions does the IRS initiate in a year? And you and I both know it’s under 2000 per year. Usually it’s more like a thousand or 1200, and we’ll see what happens with budget cuts.
But 250 million tax returns, a thousand or 2000 prosecutions the people going to jail are scammers. Ponzi schemers money launderers. There’s a fair number of tax preparers who end up in jail because they cheat on behalf of their clients, and often the clients don’t even realize it. There’s a case working its way through the courts right now where a tax preparer cheated on a client’s return in, I [00:05:00] believe it was 1996.
Mike: Wow.
Ed Lyon: The IRS is now chasing that client for the tax bill, and they’re arguing to the court reasonably. Are you freaking kidding me? I mean, that is their formal legal argument and it should be enough to win.
Mike: Yeah. You know, and, and I always think it’s interesting because people here, or people think about this concept of paying less in tax, and the initial reaction is that if you’re paying less in tax, that means you’re paying less to the government and you feel like you’re cheating them.
And I think that that’s an important concept to kind of start to change, is that the government. Tax strategies are there because the government wants business owners, they want their citizens to do specific things and Right. They can’t make somebody do ’em. Right.
Ed Lyon: If you bought a house, you took the mortgage interest deduction for granted, but that wouldn’t exist if it weren’t for generations of legislators saying, we want America to be a nation of homeowners, not [00:06:00] renters.
So are you somehow cheating the system by buying your own home and taking that step down the road towards financial security? Of course not. Yeah. Congress wants to encourage that behavior. Congress wants to encourage companies to provide healthcare for employees. Congress wants to reward investors for holding.
Long-term assets. Congress wants to reward philanthropists for giving money to charity. These are all legal tax strategies, and you gotta realize there is a reason behind them. Congress doesn’t pass tax laws for no reason. Sometimes you have to do a little digging to figure out why they did it, but there is always a rational reason.
Behind the law.
Mike: Yeah. So when you talked about, you know, most people that are, that are going to jail, it’s because of fraud, it’s not necessarily an aggressive tax strategy per se. [00:07:00] What do you think creates that separates a creative strategy from something called like an abusive strategy in the eyes of the IRS?
What, what creates that separation between those two?
Ed Lyon: So when you get into the weeds, there are a lot of gray areas. In tax. So in some cases the IRS says, yes, you can deduct this. In other cases, the IRS does not say, no, you can’t deduct this. So there’s a lot of gray area there and a lot of strategies in involve taking deductions.
Simply because the IRS has not specifically prohibited them for years. The Augusta rule fell into this category, and I’m sure you’ve talked about the Augusta Rule here on your podcast. It lets a business owner rent his or her house from. Rent his or her house to the business for a business function.
And the [00:08:00] IRS never said you could do that. And because of that, there were a lot of conservative tax advisors who said I don’t feel comfortable mm-hmm. With this strategy. Mm-hmm. Then in 2023, the tax court released two opinions that discussed the Augusta rule. In one of those cases, the clients had not bothered to document how they established the value.
Of the houses, and they hadn’t documented the meetings themselves, so the IRS shot them down, didn’t shoot them down because there’s something wrong with the Augusta rule. Shot them down because they didn’t substantiate the deductions. In the other case, the taxpayers had established that they had paid money and recorded the meeting, and the IRS auditor allowed the deduction.
And the tax court allowed the deduction. So finally now the tax court says, yes, you can do this. Yes, this is legitimate. So that’s an [00:09:00] example of a gray area strategy that nobody was ever gonna go to jail for. If the tax court just said no Augusta deduction, people would stop taking the Augusta rule deduction.
Where you cross the line is where the IRS has already said, you cannot do something. So, for example, there is a strategy that I see fairly often on social media that alleges that you can move your business into a trust, a special copyrighted, irrevocable, non grantor, discretionary spend, thrift trust, and take advantage of.
Code section 6 43 B to not pay tax on the income. Well, the problem is that argument is based on a misreading of code Section 6 43. The IRS is aware of the strategy. In August of [00:10:00] 2023, the general counsel’s office published a memo saying, yeah, we’re aware of this. It doesn’t work. Here’s why. That’s the kind of strategy that could result in criminal prosecution.
Now, the people who are selling that strategy believe in good faith that they are right. Just because the IRS says something doesn’t mean they’re right. And people file cases in tax court every day because of their good faith belief that the IRS got it wrong. But now we’re, we’re closer to the edge of the gray area and you can see where the IRS would have cause to issue an injunction against the promoters or actually launch a prosecution a couple years ago.
A financial advisor that I work with brought me a different. Trust scheme. And this involved putting your business in a business trust. And then the business trust income would flow through to a personal trust and some of that income [00:11:00] would flow through to a charitable trust. And magically, like Harry Potter, you knowOr with the magic wand.
Suddenly the cost of maintaining your house in the personal trust becomes deductible. Where it wasn’t previously, and I looked this over and I said to the advisor who sent it to me, I said, this is just flat out fraud. It’s fraud all the way down. Yeah. Well, about a month later, the IRS issued an injunction against the people selling the trust and then.
And this is rare, they actually prosecuted one of the clients of this company because it was such obvious, it Can I say bullshit on your podcast?
Mike: Yeah. Go for it.
Ed Lyon: It was such obvious bullshit. And, and it’s really, it’s a, it’s testament to people’s power to believe in something they want to.
There are people who hate paying taxes, and if you can throw them something that looks like a life raft, they’re gonna jump.
Mike: Yeah. You know, and one thing that you brought up was this idea of charitable contributions. And [00:12:00] obviously this is black and white in the tax code, this idea of charity. But there’s a specific case that goes back a couple years now of somebody that was building some of these trusts or LLCs and it was a charitable type structure.
And whether that’s structures right or wrong, could, can be talked about. But what they specifically were doing is they were taking a charitable contribution for last year. But no, no money was made to any charitable organization. Right. Until this year. Mm-hmm. So they’re taking, you know, making a contribution, let’s say in on January 10th, and they’re saying it was for the prior year.
Right. Backdating documents. And that’s exactly kind of what you talked about, is that is fraudulent. You’re backdating documents, you’re changing different things, and that is a clear whether that strategy was good or not. If you take fraudulent activity in it.
Ed Lyon: I’m familiar with the case and.
I had a conversation with the sponsor of that program, ironically, it was about a month before the IRS issued the injunction. I, I listened and I thought, this doesn’t sound right. The [00:13:00] structure was a charitable limited liability company, and there’s nothing illegitimate about that structure.
What’s illegitimate is backdating and lying to the IRS and soliciting your clients to tell them something that’s not the truth.
Mike: Yeah. You know, and when I think about this topic I always talk about tax strategy from a very basic level to an advanced strategy level. Mm-hmm. There is room for you to take something that’s illegal and make it illegal.
And that’s why I always say tax strategy isn’t just about implementing the strategy. It’s about correctly implementing that strategy. And so I look at like, you could have an S corporation with a reasonable salary that’s not documented. Relatively basic concept, but you just didn’t document it. And that could lose in the event of an audit.
Or maybe you have an Augusta rule with no meetings that you kind of mentioned or hiring kids with No job descriptions or no actually work being done here. You’re taking legal strategies but making them illegal based on the way that you’re implementing them.
Ed Lyon: Correct.
Mike: [00:14:00] Absolutely. And I think it’s funny because, you know, you mentioned Augusta rule and being in tax law and one of the cases lost.
Well, you’re gonna see on headlines, Augusta Rule. Not allowed. Or Augusta Rule is illegal or Augusta Rule abuse. Yeah. Uhhuh. When that’s not really the truth. It was not the Augusta rule that was abusive. It was the person implementing it that abused the rule, essentially. Right.
Ed Lyon: This leads back to your original question, which is, you know, people look at a strategy and they think, am I going to go to jail? It’s not enough to look at the concept or the strategy, it’s the execution. Mm-hmm. It is the implementation. You’ve gotta dot your I’s and cross your T’s. You’ve gotta document things. And even for the most valuable strategy, there’s no free lunch.
And the strategy has to be. Implemented properly. It’s usually downstream of the concept. Now with the 6 43 B Trust that I [00:15:00] mentioned earlier, I would say that the concept itself is the problem. It’s a fundamental misreading of code section 6 43 B, and most of the influencers you see touting it on Instagram aren’t.
Attorneys, they aren’t CPAs, they aren’t enrolled agents. They don’t have any particular tax expertise. So buyer beware. But some of the other strategies, yeah, the Augusta rule, the IRS will accept an Augusta rule deduction if you do it properly. The, I Nobody thinks it’s controversial to deduct mileage on your car.
Yeah. But if you get into an audit and you’ve claimed 30,000 business miles a year, the IRS is gonna wanna see some records. And nobody thinks they’re being the gestapo to wanna see. It it’s not even that hard. If you get your oil changed on July 1st and December 1st, show them the receipt with the miles on the car recorded on the receipt.
It doesn’t have to be that complicated, but. [00:16:00] Some people it ultimately, it comes down to temperament and it comes down to fit, right? So some people invest their money in whole life insurance. Other people invest their money in crypto. Some people are very conservative, including some accountants. Who are very conservative.
I had a call last week with a client, his CPA was on the call I’m trying to think of the technical term for the CP. We’ll go with wsi. And I had presented the concept of using a C corporation as a management company to take advantage of the difference between the. 37% top individual rate and the 21% corporate rate and the CPA said, I don’t like C corporation strategies.
My friends and I don’t like it. We think it would be too easy for Congress to change the rates. And I was just, I was gobsmacked. I thought, well, first of all, nothing’s gonna happen until after the 2020 election. If the Democrats have. The trifecta, the White House, the House of [00:17:00] Representatives, and the Senate, and they passed legislation in 2029 that raises the corporate tax rate.
That won’t become effective until January 1st, 2030. So don’t we at least wanna take advantage of the four years that we will have of the lower corporate? You’re throwing it all away because you think something may change. I would say. That’s too conservative and I will tell the client that is too conservative.
The client will end up making up his own mind.
Mike: Yeah. Yeah. So, so
Ed Lyon: It’s about fit. It really is about finding the right fit. And I see a lot of times business owners particularly, they hear the word tax and they instantly think, I’m going to delegate it to the CPA. And that can be a mistake.
Typically, the CPA is the most conservative member of the business owner’s team of financial advisors. And [00:18:00] this, the client, the business owner is often not aware of the difference in temperament. So do you wanna take a step out into the gray area? Some people. Absolutely. Some people know and that’s fine.
Again, it’s a matter of fit. What drives me nuts are the people like the CPA who said, I don’t want to do a C corporation. ’cause they might change it in the future.
Mike: Yeah,
Ed Lyon: that’s not even taking advantage of everything. That’s black letter law in the code.
Mike: Yeah. So I, I think this brings up a good point.
I was having a conversation once with somebody and I was talking about tax risk, and and they were astonished by that, that those two words being used in the same sentence, tax risk. And I think the risk we might’ve been talking about like, okay, if this isn’t done correctly or in agreeable to the IRS, then there’s a chance that could get audited, and that’s the risk that we’re taking in a specific strategy or whatever it’s mm-hmm.
But they never thought. That the word tax and risk should be combined in a similar [00:19:00] sentence. So talk to us a little bit about that concept of tax risk and what that means. Like why is there a tax risk? Why isn’t it just black and white?
Ed Lyon: Well, again, it’s because of the gray areas. Yeah. And there are so many situations where Congress can write broad rules, but they can’t.
Comprehend every possible iteration. There was a story just this morning, I believe in the New York Times about how the IRS is starting to go after giant tech companies like Meta for the way they valued certain assets that they put into foreign subsidiaries. So big tech companies. Typically break out their intellectual property, their patents, their copyrights, their trademarks, all that stuff, and they route them through someplace like Ireland and eventually put those assets in a place like the Cayman Islands, where there’s either no tax or a substantially lower tax than in the United States.
That’s fine. [00:20:00] That’s legit. The hard part is the implementation. Okay. We’re taking the Facebook algorithm, this is the secret or no while you say Instagram. This is the secret Instagram algorithm that is designed to make teenagers feel suicidal. And we’re going to route a hundred million dollars a year of income into this place where we won’t have to pay tax on it.
So how much should they be? Selling that asset to, what’s the valuation on the transfer? How do they handle that? And so the IRS is coming and they’re saying, look, you lowballed these assets.
Mike: Yeah.
Ed Lyon: 20 years ago when you move them into these foreign jurisdictions, we’re gonna go back and we’re going to argue that you lowballed them.
And we’re going to collect, I think in Meta’s case was $15 billion in taxes. And you know, you, you throw in Google and. Amazon and all the other companies we’re looking at, at potentially hundreds of billions of dollars in, in taxes. [00:21:00] So it’s a matter of could Congress have anticipated that? When they wrote the law, could they have anticipated the particular route through the double Dutch Irish sandwich that businesses would take?
And that’s a real thing, by the way, the double Dutch Irish sandwich. Most of you listening to the podcast don’t need to know that because you’re not big enough to take advantage of it. But life is messy. The real world is messy and. The tax code can’t anticipate every situation, so that’s where the gray area comes in.
At the very basic level, you and your tax professional come up with the first offer. Okay, and that’s what goes on your tax return. Then the IRS may look at it. They may not look at it. They’re not auditing many returns right now. Odds are pretty good that they’re not going to look at it and you’re not going to have a problem.
But if they look at it and they disagree, they may disagree. You can [00:22:00] appeal, you can go to tax court. There’s all sorts of avenues to resolve the gray area. But what we’re looking at fundamentally is a gray area that exists because the law can’t anticipate every situation.
Mike: Yeah. And, and I think a good example is look at the Supreme Court.
When you look at s Supreme Court cases, very seldom does every single judge vote the same way. It’s usually a split decision or a six to three or whatever the number is. They’re all looking at the same exact law. They’re all looking at the same facts, same circumstances. Just different opinions are gonna bring up different decisions on that.
Ed Lyon: You could, you would probably have a hard time getting nine Supreme Court justices to agree that ice cream tastes good, because, you know, Gorsuch likes the Rum Raisin and Amy Coney Barrett, her kids love the, oreo cookie. That’s her favorite too. And Clarence Thomas is a caramel fan and John Roberts likes chocolate.
And pretty soon you’ve got concurrences and dissenting in part and concurring in part. And then somebody comes in and says, well, what about [00:23:00] gelato? That’s pretty too. Yeah.
Mike: Yeah. So let’s take a step back and let’s look at advanced tax strategies. These are, say, asset purchases, donations, solar, all these types of different captive insurance.
We talked about a trust and how the people selling these types of things are. Sometimes CPAs oftentimes not, but they’re salespeople, right? And so when you talk to them, they can make anything sound. Legitimate, right? When you talk to these trust people, the way that they sell this is, it sounds legitimate.
They’re not saying, well, this isn’t really how the code’s written, but, you know, just kind of turn the other way for that. They’re making it seem like it’s legitimate. Sure. So, ed, when you do due diligence on a more advanced type of tax strategy, what type of actions are you doing and what do you kind of recommend people ask in some of those situations if they are reaching out or getting hit up by somebody regarding a tax strategy?
How do they do some of those due diligence without, you know, being able to know all the tax code front to back, and everything else?
Ed Lyon: Well, ultimately it comes [00:24:00] down to who is your counterparty? Who is the person you are doing business with, and are they reputable? I want transparency. I want to know what section of the code.
Gives rise to this opportunity. I wanna know what due diligence the sponsor has done on that section of the code. I wanna know what the pitfalls and the downfalls are. You know, I know to look for things like lack of economic substance or basis inflation, things like that. Part of it is just a matter of experience.
And, you know, part of it is the smell test and understanding that if I say no to a strategy, it may just be that I am not comfortable.
Mike: Mm.
Ed Lyon: With that strategy, somebody else may be comfortable. I don’t want to just say that’s why we get paid the big bucks, but that’s. Why we get paid some of the bucks is to be Sherpas for our clients who are looking [00:25:00] for savings opportunities, and we’ve gotta present the good, the bad, and the ugly if we’re gonna be ethical planners, helping them find the right fit.
Now I have run into some. CPAs who will not sign a return that takes advantage of, of certain strategies. Sometimes that’s hyper cautiousness. Other times it’s legitimate caution if they just don’t feel comfortable with an investment strategy or something like that. But, I think the big thing is transparency.
There is a strategy that is no longer available. It involved buying bonds, convertible tax bonds that would be redeemed with the IRS. You would pay 75 cents. On the dollar for a bond that could be redeemed for a dollar of taxes. It was a fairly convoluted process, so there were potential attacks on the process, [00:26:00] but the whole structure was premised on buying into an entity that had tax losses from a bank that went bust.
I could never find out the name of the bank that went bust.
Mike: Hmm.
Ed Lyon: That’s the kind of lack of transparency that sets off red flags. This particular program also said that they had a credit default swap in place that would pay off if the tax court struck down. The strategy, which is, seems like a great form of insurance, but the insurance company’s gotta be pay gotta pay off.
So who is the counterparty of that credit default swap. Now the, this particular strategy, these bonds all sold out before I had the chance to sit down with the vendor and say, okay. Who’s the bank? Who’s the counterparty in the credit default swap? How does this stage work? How does this stage work? But those are the things that I’m looking for.
[00:27:00] And just to be sure, I’m not saying that particular tax credit bond is legitimate or illegitimate. I simply don’t know. But those are the questions that I would ask.
Mike: Yeah, that’s super helpful. As we look to, to end up, I got two more questions for you. The first one is if you could give business owners kinda one piece of advice around tax risk, what would it be?
Ed Lyon: So understand that tax risk is just another risk that you face in running a business. If you run a trucking company, one of the risks is that a truck is gonna run off the road. Another risk is that one of your customers is going to fire you. Another risk is that one of the truckers is going to sexually harass someone who works in your office.
Tax risk is just another risk, so you need to look at it. Not as something that’s walled off in your CPA’s world, but something that you as a business owner address and understand your own risk tolerance. [00:28:00] Most business owners tend to be more comfortable with risk than the rest of us. That’s why they’re willing to start a business and not have a salary for themselves.
So understand where your tax preparer falls on the. Not just the conservative to aggressive spectrum, but on the reactive to proactive spectrum. So tax risk is simply another form of risk. And then the second thing about tax risk is really understand what it is. The audit rate is under one half of 1%.
Even clients who are making a million dollars a year or more rarely face more than about a, a one and a half or 2%. Risk of being audited. Different factors will adjust your audit risk up or down, and dig into those factors. Some strategies [00:29:00] may not affect your own audit risk. For example, if you are.
Establishing a captive insurance company and the IRS wants to audit you, they’re gonna audit the captive insurance company. They’re not gonna go digging around in your own records. They don’t need to go digging around in your operating company’s records to determine whether they think your captive insurance company is legit or not.
So it really is about being educated, and when I hear someone who’s a serious business owner. Serious investors, serious real estate owner, when I hear them say, am I going to end up in an orange jumpsuit? That tells me more about their level of, of, of education in this area than it does about their risk tolerance.
So they, they ask that question because. It’s the only thing they know to ask. Now, I don’t know if you talk with other tax business owners on your podcast. There’s [00:30:00] a lot of discussion within the tax preparer community over fees, and people will come in and they’ll say, oh, my last guy only charged me a thousand dollars to do that.
And you’re thinking, well, this is a $5,000 job and. Do you try and fit $5,000 worth of service into a $1,000 fee? Or do you just look at your prospective client and say, you know what, we’re, we are not a fit. The just, you just gotta understand what you’re getting into. And what I find is that a little bit of education goes a long way to help people make more informed.
Decisions about these sorts of risks.
Mike: Yeah, no, that’s super helpful in what we’ve been talking about. I think is, is definitely helps people understand kind of what that even means when they talk about risk and really what the reality is about it. Ed, final question, and this is a question that you asked me when I was on your podcast and I know you ask other people on your podcast, but what’s your favorite tax strategy right now that you like to talk to business owners about?
Ed Lyon: So [00:31:00] if someone is the right candidate, my favorite tax strategy right now and it might even be a different answer than the one I gave you when we re recorded you on my podcast a few weeks ago. I’ve been doing more with the charitable lead trust and the charitable lead. Trust is a way to endow a fund to make charitable gifts over a period of time.
Accelerate all of the deduction for those gifts into this current year. So it’s a tax time machine. And then at the end of the period, get back the money or leave the money to your heirs. It’s especially valuable for somebody who’s looking at estate tax exposure, who wants to leave money for their kids and discount the transfer tax cost of doing it.
But I have probably. 25 go-to tax strategies that I present to nearly all of my business owner clients. And another 10 strategies that I [00:32:00] present to my high income W2 clients. I’ve got a dozen go-to strategies for people selling businesses or appreciated real estate. It’s hard to have a favorite.
It’s like having your own kids, right? I’ve got three kids. How many kids do you have?
Mike: Three.
Ed Lyon: Right. So every parent has a favorite kid. They just don’t wanna admit it. My problem is my favorite kid is one of my own.
Mike: Yeah, that’s great. So I’m
Ed Lyon: teasing kids. You’re all my favorite.
Mike: So here’s the bottom line.
Most business owners, they don’t get in trouble for smart tax planning. Yeah, they get in trouble for ignoring compliance. They’re get in trouble for cutting corners or following the wrong people. The tax code is really built for planning. But it rewards, documentation, intent, and proper execution, right? So if you found this helpful, don’t forget to hit subscribe.
Hit that like button and share it with a business owner who’s sick of paying too much in tax. And if you want help from our team of tax professionals implementing a lot of what we talked about today, visit us at tax L. That’s TAX elm.com, or click [00:33:00] the link in a description for our free discovery call.
We are helping business owners like you legally lower your tax bill every single day. Ed, thanks for coming on.
Ed Lyon: My pleasure. Thanks for hosting me.
Mike: Yeah, and everyone else, I will see you on the next one.
Thanks for tuning in to the Small Business Tax Savings Podcast. We hope today’s episode sparked some brilliant ideas to help you save on taxes and grow your wealth. If you loved what you heard, hit the subscribe button and share the wealth with fellow entrepreneurs. For a treasure trove of tax saving resources, visit tax Savings podcast.com.
There you’ll find tools, guides, and all the info you need on reducing your taxes. Let’s elevate your business to new heights together. Remember the insight shared here for educational purposes and not specific tax or legal advice. Always consult with a qualified professional for your unique situation.
Until next time, keep thriving and [00:34:00] saving.