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Posted by Tiffany Gaskin

Understanding the Difference Between Tax Evasion & Tax Avoidance

Understanding the Difference Between Tax Evasion & Tax Avoidance

The United States tax system is tax strict meaning citizens are to voluntarily complete their tax forms when it is time for the taxes. Taxpayers must submit their tax returns on time and comply with the tax system. However, many taxpayers look for means to reduce their tax liabilities to get higher after-tax income. 

As a result, it may involve tax avoidance or tax evasion. Although tax avoidance is a legal process of reducing tax liabilities, the latter is an illegal and punishable offense under federal law. This article explains the difference between tax evasion and tax avoidance.

What is Tax Evasion?

Tax evasion is an illegal means of reducing tax liabilities by hiding taxable income from the authorities. The IRS considers it a fraudulent activity and deliberate avoidance of paying taxes. Tax evasion is when an individual refuses to pay taxes. Individuals or corporations may also misinterpret their taxes. 

How Tax Evasion is carried out

The tax system has lawful ways to avoid taxes, but individuals have claimed unlawful ways to evade taxes, such as

  • Refusal to state income earnings from unlawful practices.

  • Refusal to state business income by hiding cash receipts.

  • Refusal to say income earned from a second job.

  • Refusal to state income earned outside the United States.

  • Refusal to state interest accumulated on accounts outside the United States.

  • Refusal to state income earned from cryptocurrency transactions.

  • Increasing business expenses.

What is Tax Avoidance?

Tax avoidance is using legal methods to reduce tax liabilities. The process is legitimate as taxpayers take advantage of the loopholes in the system to reduce the amount owed in taxes and taxable income. Such taxpayers maintain the affairs of the business in a way that reduces tax levies. In other words, tax avoidance is taking advantage of legal practices to minimize tax liabilities, although not intended by the law. The technique uses transactions that have tax advantages in the tax system. For example, you can make legal deductions to minimize taxes, such as changing one's business structure by incorporation. 

How Do Taxpayers Engage in Tax Avoidance?

There are several tax avoidance practices taxpayers indulge in to avoid their tax obligation. Here are some popular ways:

  • Giving to charity

  • Investing in an individual retirement account

  • Taking a child tax credit

  • Taking mortgage tax deductions

However, these methods are applicable for tax deductions under the IRS tax code.

Tax Evasion vs. Tax Avoidance

The primary difference between the two terms is that tax evasion is a deliberate act of not paying taxes, while tax avoidance is a legal practice to decrease taxable income. For example, tax evasion is refusing or under-reporting taxable income to authorities and hiding money and other assets in an offshore account to avoid taxes. Meanwhile, tax avoidance claims capital allowance on business entities at a lower rate. 

Another difference is that tax evasion is a criminal act under the IRS code, while tax avoidance is a legitimate method to dodge taxes. In other words, the IRS does not punish taxpayers for the tax advantage of the tax system loopholes to reduce tax liabilities. 

Many taxpayers think tax evasion is illegal but do not know the impact of both terms on the economy. The two terminologies reduce the taxpayer's expected revenue, which has downslope effects on the economy.

In conclusion, tax evasion and avoidance harm the country's economy. However, the primary difference is that tax evasion is illegal, and tax avoidance is legal in the tax system. Although the law does not punish taxpayers for tax avoidance, the practice is not advisable due to its negative impact on the economy.



Tiffany Gaskin
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