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Understanding the Difference Between Tax Evasion and Tax Avoidance

difference between tax evasion and tax avoidance

What Is The Difference Between Tax Evasion and Tax Avoidance?

Usually, the payment of taxes is a lackluster affair, as nobody ever enjoys fulfilling this constitutional obligation. Nonetheless, since it is an essential source of any country’s revenue, failure to pay taxes usually has severe implications, most of which are significantly adverse.

Concerning the failure to remit the required tax amounts in time, most people often use the terms ‘tax evasion’ and ‘tax avoidance’ interchangeably. However, these terms are not remotely similar. Whereas tax evasion is illegal, tax avoidance is permitted by the law, and a tax preparer usually facilitates the process on behalf of either an individual or a business.

What is Tax Avoidance?

Tax avoidance is simply the process of reducing tax liability using legitimate ways. Mainly, it involves capitalizing on shortcomings within the law with the intention of reducing the total amount owed to the IRS. In some instances, tax avoidance is used to postpone the payment date for tax liability.

The most prevalent strategy for tax avoidance is the claiming of tax credits and deductions.  Claiming exemptions can also significantly contribute to the reduction of the tax liability. Individuals or institutions who wish to postpone the due date for the payment of tax dates can deposit their money into an IRA, 401(k), or SEP-IRA.

Yearly, a majority of citizens overpay their tax liabilities primarily due to the failure to keep records and lacking in-depth knowledge of the law. Therefore, it is advisable to consult a tax attorney so that they can implement tax avoidance tactics to reduce your tax debts.

What is Tax Evasion?

Tax evasion is the intentional act of failing to either file tax returns or pay the tax liability or both. Additionally, falsifying the taxable income records or using underhand tactics to avoid payroll and other taxes also count as tax evasion. Notably, tax evasion is a severe crime that attracts dire consequences, such as hefty fines and lengthy jail terms.

As mentioned above, tax evasion is a criminal act that has serious implications. As of now, the fines imposed on tax evaders can go up to a maximum of $500,000. On the other hand, incarceration resulting from the dodging of taxes depends on the State of conviction as well as the extent and nature of the evasion. The jail terms can range from anywhere between a few months to several years.

Difference between Tax Evasion and Tax Avoidance

Besides legality, the other significant difference between evasion and avoidance of tax is the time at which the act occurs. Usually, tax avoidance takes place before the calculation of tax liability, as it is meant to reduce the total amount beforehand or defer the payment date. Tax evasion, however, often occurs after the imposition of tax liability, since its motive is to avoid paying tax debts entirely.

From an ethical perspective, tax evasion is entirely unacceptable, since it involves heinous acts such as falsification, understatement, and so on. Alternately, tax avoidance consists of the use of legal methods, making it morally acceptable.

Contact An Attorney

If you find yourself in a situation where you need an experienced tax attorney on your side or if you just need legal advice, call the tax attorneys at Ayar Law for a free, confidential consultation at 248.266.3400

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.