The terms tax evasion and tax avoidance are often used interchangeably, but there is a big difference between the two. While both tax evasion and tax avoidance can save money, it is important to know the difference between the two so that individuals can make sure they are staying on the right side of the law. Read on to learn more about tax evasion vs. tax avoidance.
Defining Tax Evasion and Tax Avoidance
Tax evasion and tax avoidance are two separate concepts but have often been confused as the same. While tax evasion refers to the illegal act of not declaring income to avoid paying taxes, tax avoidance refers to taking advantage of legal methods to reduce the amount of taxes paid. This may include utilizing deductions and other tax credits with the intent to pay a lower amount in taxes due to changing or lowering taxable income.
Tax avoidance is not considered illegal, but it may raise eyebrows for tax agencies that focus on ensuring that citizens follow regulations set forth in accordance with the Internal Revenue Service (IRS). It should be noted that during this process, all documentation must be filed properly and remain truthful as any claims otherwise will bring about an investigation or audit which can prove costly.
Key Differences
Any form of fraud or concealment of assets would be an example of tax evasion and can lead to felonies such as jail time in some cases. It is important for business owners to understand that there are significant risks involved when attempting to go beyond legitimate practices and engage in fraudulent activities like tax evasion.
Legality
Tax evasion is the illegal practice of not paying taxes. This illegal activity can result in hefty fines and even jail time for those convicted of tax evasion. Tax avoidance is the opposite - it is using legal methods to lower the tax liability. Tax avoidance usually involves utilizing techniques like optimizing deductions or mitigating costs through investing, which can ultimately reduce the overall tax burden without breaking any laws.
Additionally, understanding the available options for claiming tax exemptions and credits can help minimize taxable income without breaking internal revenue laws. Knowing how to successfully avoid taxes legitimately is beneficial to both businesses and individuals alike and should form part of a diligent financial planning strategy.
Penalties for Tax Evasion
Tax evasion is an unacceptable action that can carry with it severe penalties. The Internal Revenue Service (IRS) takes cases of tax evasion very seriously since evading taxes deprives the government and other taxpayers of necessary funds. Taxpayers convicted of tax evasion may face very high fines and could even be incarcerated, depending on the severity of their offense.
The most important thing to remember is that while some methods of reducing taxes are perfectly acceptable, deliberately avoiding or concealing the payment of taxes is not. Even an honest mistake on your tax return, such as an incorrect filing status or a miscalculated deduction, can have costly consequences if it is discovered by the IRS.
If you have been accused of tax evasion, contact Johnson Law Group.