13 Feb Tax Avoidance or Tax Evasion – The Difference
The two terms do sound quite similar, and to many, they might even appear to be the same. But, the reality couldn’t be further from that.
With this text, we will explain the variance between the two terms, and you’ll understand why it’s essential for you to know the difference.
First of all, the main distinction you need to be aware of is the legality of these two things.
Tax avoidance is legal, while tax evasion is not. That’s the primary matter that you have to know and understand about these often interchanged terms.
Tax avoidance implies using any legitimate methods to avoid paying taxes like using certain tax deductions, credits, or setting up deferral plans. All in all, anything legal goes here, and it’s ok not to pay particular taxes as long as there is a legal way to do it.
Tax evasion, on the other side, implies not paying taxes using illegitimate, illegal means. That can be by not reporting your income, not paying certain taxes you owe, understating the amounts you owe, reporting more expenses than you are allowed, and thus getting more tax deductions, and much more.
So, all in all, if you don’t want to get in trouble with the IRS, don’t try to pull any illegal stunts to avoid paying taxes, only legal means that are available to you.
Tax and Tax Loopholes
We already explained tax avoidance, but it’s worth mentioning tax loopholes as well. They fit the bill of tax avoidance and represent certain technicalities that allow people or businesses to avoid the scope of law without directly breaking it.
They are frowned upon by some, especially the IRS, but they are still entirely legal means through which tax avoidance can be achieved.
There are many loopholes that one can use to their benefit, as the law is quite complex, but that also means that you need to have a lot of knowledge and expertise to be able to find them.
How to Avoid Tax Avasion
In essence, anything that you do that is understood as knowingly failing to report income is considered as tax evasion.
Tax evasion is the same as tax fraud because deceiving the IRS or misrepresenting facts is what someone who’s trying to evade taxes does.
With such a broad meaning and heavy penalties, it can easily happen that you unknowingly perform practices that are considered as tax evasion, and thus you can be charged for breaking the law, or even worse, end up behind bars.
It’s thus essential to understand how to avoid this, and the best way to achieve this is by knowing all the laws that affect you. You need to be careful with how you keep your books, how you count your deductions, and much more.
Naturally, it’s most likely that you won’t ever manage to commit tax fraud unknowingly, but it’s still important to know how it all works, especially if you run a business.
If you’re looking to understand more about the tax laws that govern what you do, feel free to contact us and we’ll make sure to give you all the assistance you need.