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What’s the difference between tax avoidance and tax evasion?

On Behalf of | Jun 5, 2023 | Tax Law |

Nobody wants to pay more taxes than they have to pay – which is why both individual filers and businesses often employ various strategies to minimize their tax liabilities.

There’s nothing really wrong with minimizing your taxes as long as you understand the key differences between “tax avoidance” and “tax evasion.”

What’s tax avoidance?

Tax avoidance refers to the practice of arranging one’s personal or business financial affairs in a manner that reduces tax liability within the boundaries of existing tax laws. It involves the strategic use of legal loopholes, exemptions, deductions and other provisions within the tax code to minimize tax obligations. It typically involves a lot of advance planning with taxation always in mind.

The key thing to know about tax avoidance strategies is that such methods are:

  • Legal: Tax avoidance operates within the confines of tax laws, using valid deductions, exemptions and credits to optimize tax outcomes.
  • Transparent: Tax avoidance practices are generally disclosed in tax filings, not hidden.
  • Focused on minimizing tax liability: The primary objective of tax avoidance is to reduce tax obligations by taking advantage of tax provisions and incentives.

For example, tax avoidance might include things like using tax credits for renewable energy investments to lower a company’s overall tax liability, or structuring your business formation to take advantage of favorable tax jurisdictions and incentives.

What is tax evasion?

Tax evasion, in contrast, is any illegal practice that involves intentionally trying to evade the payment of taxes by some illegal means. It can involve things like concealing income and assets or misrepresenting financial transactions in order to lower apparent tax liabilities.

The main characteristics of tax evasion tactics are that they are:

  • Illegal: Tax evasion involves deliberate acts that are illegal, like not reporting cash income and making sure that no record of such transactions are on the books.
  • Intentional: A mistake that leads to the underpayment of taxes isn’t the same as intentional evasion, such as purposefully inflating business expenses or hiding assets through shell companies and offshore accounts.
  • Concealed: Tax evasion generally involves acts that someone doesn’t want to be honest about with the Internal Revenue Service.

Tax evasion is considered a criminal offense and can lead to fines, penalties and even imprisonment.

When you have tax questions or you’re concerned about legal issues involving taxation, it’s always best to get experienced legal guidance that’s specific to your situation.

We insist that your taxpayer rights are protected and your options are known.

Our services are confidential and are protected under the attorney-client privilege as allowed by law.