What comes to mind when you hear the words “tax evasion”? Probably images of people sneaking around with briefcases full of cash, trying to avoid detection by the tax authorities. But what about “tax avoidance?” What’s that all about?
Aren’t they just two different terms for the same thing? Actually, they’re not – and understanding the difference is vital if you want to stay on the right side of the law.
This blog post will take a closer look at tax evasion and tax avoidance and explain what makes them different. Stay tuned!
Tax Evasion
Tax evasion is the deliberate underpayment of taxes owed to the government. This can be done in many ways, including failing to report income, claiming false deductions, or hiding assets in offshore accounts.
Tax evasion is a serious offense that can result in criminal penalties, including fines and imprisonment. While trying to avoid paying taxes is tempting, it is essential to remember that tax evasion is a crime that can have serious consequences.
If you are accused of tax evasion, it is crucial to seek experienced legal help as soon as possible.
Tax Avoidance
Tax avoidance is the practice of reducing or eliminating taxes on income, estate, or gifts. Tax avoidance strategies include deductions, exemptions, shelters, and other financial planning tactics used to reduce or eliminate income tax liability.
The Internal revenue Service (IRS) has strict rules about what constitutes tax avoidance. It is not legal for taxpayers to use aggressive tax planning strategies to avoid paying taxes. Taxpayers have a legal obligation to pay their fair share of taxes based upon the tax law in effect when they file their returns.
Tax avoidance strategies are not always illegal. However, they must be done in accordance with U.S. tax laws and regulations.
The Consequences of Tax Evasion and Tax Avoidance
At first glance, tax evasion and tax avoidance may seem to have little in common. Tax evasion involves breaking the law; avoidance involves obtaining the same result legally. But they are connected in meaningful ways.
Tax evasion is a crime; tax avoidance is not. But both involve deliberate attempts to evade taxes or otherwise reduce the amount of taxes owed by individuals, businesses, or governments. Both can also happen unintentionally due to poor bookkeeping practices or miscalculations. And both pose high economic costs as governments struggle to recover lost revenue and make up for lost trust among citizens.
But while tax evasion and tax avoidance look similar, they are not necessarily the same.
Here are some key differences between them:
- Tax evasion occurs when taxpayers intentionally fail to report income or other taxable events on their income tax returns or other required forms.
- Tax avoidance occurs when taxpayers take steps to reduce their federal income taxes below what would have been owed if all things had remained equal. There is still enough taxable income left over after those adjustments to cover the original amount of taxes owed minus any credits that might apply.
Benefits of Practicing Tax Avoidance Instead of Tax Evasion
The benefits of practicing tax avoidance instead of tax evasion are:
- The taxpayer can avoid higher taxes, penalties, and interest.
- The taxpayer avoids the threat of criminal prosecution and incarceration.
- The taxpayer may receive an amnesty and have their taxes forgiven.
- The taxpayer may receive a reduced settlement payment in exchange for full disclosure.
How to Legally Reduce Your Taxable Income
The best way to reduce your taxable income is to increase your deductions and credits. The most common are:
- The standard deduction, which you can claim if you don’t itemize deductions,
- The personal exemption deduction, which reduces the adjusted gross income (AGI) on which taxes are computed and,
- The Earned Income Tax Credit (EITC) supplements other federal income tax credits that help low-income families pay their taxes.
You can also reduce your taxable income by increasing your itemized deductions. These include medical expenses, investment interest, contributions to charity, and more.
Conclusion
The taxation system has many subtle and complex laws. It is common for people to try reducing taxes by evading them illegally, which isn’t the most convenient route.
Although tax evasion provides immediate financial benefits and convenience, it also has legal repercussions. These consequences must be understood, and other legitimate options should be considered if you want to reduce your tax burden.
If you enjoyed this piece, you can connect with Dickson on LinkedIn.