“Tax evasion” and “tax avoidance” may seem synonymous, but don’t be fooled, they are actually quite different from one another.
In this article:
Tax Evasion and Tax Avoidance: What Are the Differences?
Let’s Take a Closer Look at Both
The terms “tax avoidance” and “tax evasion” are often used interchangeably. However, they mean two entirely different things. Tax avoidance is a legitimate practice by which you minimize your tax burden through legal deductions and tax shelters. Tax evasion is the illegal practice of failing to pay taxes, report income, or even reporting expenses not allowed by the current tax code.
Is tax avoidance legal? Yes. Provided it is done correctly and in accordance with the law.
Is tax evasion legal? Not at all. Further, ignorance of the laws related to taxes is not a permissible excuse for failing to pay your taxes, paying an insufficient amount of taxes, or failing to report income or deductions properly.
What is Tax Avoidance?
Beyond the short answer provided above, tax avoidance is a savvy method for reducing the total amount you must pay Uncle Sam each year in taxes through legitimate methods. There are many ways you can do this. One of the most common is by reducing the “income” reported to Uncle Sam by creating certain deductions, credits, or adjustments, like those listed below:
- Retirement savings
- Work deductions
- College savings plans
- Home equity loans
- Health savings accounts
- Tax deferral plans
The above are acceptable tax avoidance tactics for individuals. Businesses, however, may choose to take advantage of other types of tax avoidance strategies that include things like work opportunity tax credits and accelerated depreciation.
The work opportunity tax credit provides businesses who employ certain types of workers who typically face barriers in their job search efforts, with certain tax incentives. Employees who may qualify for this type of tax credit include:
- People receiving TANF, SNAP, and Supplement Security Income
- Specific people and youth (for summer youth employment) living in Empowerment Zones
- Vocational rehabilitation referrals
- Former felons
Accelerated depreciation is often considered a loophole for minimizing taxes. However, it doesn’t eliminate the taxes. In fact, it increases taxes paid in later years by frontloading deductions for depreciation so businesses report lower incomes in the initial years and higher income later in the tax cycle. It is commonly used by companies as they prepare for public offerings.
The laws regarding accelerated depreciation are complex, though. Businesses should not attempt this tactic for tax avoidance without working with a CPA (Certified Public Accountant). Otherwise, it may cost you far more than you stand to save.
What is Tax Evasion?
Tax evasion definition: “the nonpayment of taxes, as through the failure to report taxable income.” It sounds really simple, doesn’t it? However, there are many nuances to tax evasion, according to the law. You could find yourself in serious hot water with Uncle Sam for any of the following:
- Failing to report income. Any income. All income. Even income from side gigs, bartering services, trading goods, etc.
- Under-reporting income. This means if you have a full-time job and fail to report income from your freelance side work you can get in a lot of trouble.
- Taking deductions you haven’t earned. Mainly by claiming expenses on your returns you didn’t actually have. You can face criminal charges for falsely claiming expenses.
- Failing to file tax returns. Even if you don’t file a tax return, the government is likely to know you earned income and expects to get its fair share. They will find you, eventually, if you consistently fail to report your income.
- Deliberately underpaying your taxes. You’re not only required to file your taxes each year. You’re also required to pay them. The IRS, while unforgiving, will allow you to arrange payments if you are unable to do so when taxes are due. You may, however, have to pay penalties for this privilege.
Income tax evasion is a crime the U.S. Government takes quite seriously. They will prosecute vigorously. Even if you are eventually acquitted of the charges, it is costly to launch a defense in prosecutions such as these. It is better to avoid all possible appearances of tax evasion rather than risk the fines, penalties, expensive defense, and the possibility of jail time associated with tax evasion.
Get help before you risk facing the unknown’s associated with tax evasion. We can help you get fair treatment for your situation when dealing with what looks like an insurmountable tax debt. Contact us today to learn more about getting the second chance you deserve.
Are there practical ways you can think of to avoid tax evasion or to implement tax avoidance? Let’s talk about it in the comments section below.