Tax disclosure is a term used to describe two distinct situations. The first is the legal requirement to provide current taxation information to the other party when selling a property. The second is related to transactions that may be viewed as tax sheltering that must be disclosed to the government when filing income taxes. This is true for both personal and business income tax filings.
The exact requirements detailing what types of transactions must be included in tax disclosure can be changed by the government at any time. It is one of the many reasons why people who take advantage of tax shelters and related programs are well advised to hire a professional tax accountant. He or she is responsible for staying current on the latest decisions and understanding the pitfalls of the different options.
When selling an asset, it is very important to provide an accurate tax disclosure form. In some states, this is legally required, while it is just recommended in others. The most common transaction that requires a tax disclosure form is the purchase of a residential property. The seller must provide a current record of the property tax account, including any amounts prepaid or outstanding.
It is important to note that the government has a wide range of options to collect outstanding taxes. Seizure of property, garnishment of wages, and direct withdrawal from your bank account are just a few of the options. Purchasers who do not receive a tax form from the sellers must insist upon receipt of this document before closing the sale. It is possible to purchase a home, only to discover the government is going to seize it for payment of outstanding taxes.
Most taxpayers do not have sufficient income to be concerned about tax shelters and the need for appropriate disclosure. However, businesses and corporations are often able to access these tools as a way to minimize the taxes paid to the government. The appropriate use of tax shelters is an excellent, legal way to minimize taxes.
There is a fine line between tax sheltering and tax avoidance. A tax shelter is a method or financial instrument that allows the payment of taxes to be deferred to a later date. Pensions are an excellent example of a tax shelter. Funds deposited into a pension plan are calculated as tax credits at the time payment is made. When the pensioner withdraws the funds from the plan, they are taxed. Tax avoidance is any method or mechanism used to avoid payment of tax and is illegal.
