Everyone has to pay taxes, and everyone usually tries to pay as few taxes as possible. There are a few legal ways to use the tax code to one’s advantage. This is generally considered tax avoidance, and it is not necessarily a bad thing. There are also a few illegal ways to exploit the tax system–and this crosses the line into tax evasion.
So what are the main differences between tax avoidance and tax evasion? Well, one is perfectly lawful and is often encouraged. The other could land you in jail. To help you better understand the two, we will look at the differences between tax avoidance and tax evasion.
When you do your taxes, do you look for as many deductions as you can? Have you ever taken a tax credit? Perhaps you have set up a tax deferral plan like an IRA or a 401(k) to delay the taxes you owe? These are excellent examples of tax avoidance. Tax avoidance is using the Internal Revenue Code or state tax code to one’s advantage in order to minimize taxes. Many private individuals and businesses try to pay as little tax as possible. It is perfectly common, and perfectly legal.
Tax evasion is another matter. It is the illegal practice of not paying taxes by underreporting income, over-reporting expenses or not paying taxes at all. There can be serious penalties for tax evasion ranging from hefty fees to jail sentences. Sometimes, there can be a fuzzy line between tax avoidance and tax evasion, such as using questionable technical loopholes to avoid taxes. The IRS does not look kindly on taxpayers who attempt to evade taxes through tricky loopholes. It is also unwise to attempt tax evasion and claim ignorance of the law as a defense. Taxpayers who wish to minimize their taxes without crossing the line into tax evasion should work with a financial adviser or attorney who is experienced in tax law.