California residents are among the most highly taxed persons in the nation. The state has the highest state income tax rate and a sales tax to boot. It is understandable that people in California would take advantage of every opportunity possible to reduce their tax burden. The tax laws are set up to allow and even encourage taxpayers to find ways to lower their tax bills. Yet, there can be a fine line between what some identify as legal use of tax laws and alleged tax evasion. This line might get even murkier under the new tax law.
As explained by Brookings, one significant change to be implemented by the Tax Cuts and Jobs Act is the disparity in how wages are taxed versus how income from a pass-through business is taxed. A person who establishes a pass-through business will be allowed to deduct a significant portion of their income – 23 percent to be exact – before they determine their tax liability. There may well be an advantage for people to on paper change their employment status from employee to sole proprietor or partner of one of these pass-through businesses.
It is not known exactly how the Internal Revenue Service might track or determine what is a legitimate pass-through business or what they say is simply a way of avoiding some tax payments.
The Washington Post adds that the removal of protections and rewards for people who report suspected tax fraud or tax avoidance may make others feel more confident in taking bigger risks to shield themselves from high taxes.