Tax Evasion Vs Tax Avoidance – What Is The Difference?

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Tax avoidance and tax evasion are not the same, even if they sound similar. One is a legal way to lower the tax liability, while the other may get you into serious trouble with the tax authorities. First, one must make sure to know the difference between the two phrases if one wants to pay less money to the income tax department without having to worry about going to jail.

tax evasion vs tax avoidance

WHAT IS TAX EVASION?

Tax evasion is a fraudulent strategy to avoid the legal obligation to pay taxes. When you overestimate the amount of your expenses or understate your income, you are doing fraud. 

The intentional manipulation of your income to avoid paying taxes or to lower your tax burden is known as tax evasion.

EXAMPLES OF TAX EVASION

  • Paying domestic staff under the table: Payments made to domestic workers, such as nannies or housekeepers.
  • Ignoring revenue derived from outside sources: Revenue must be declared even if you conduct business abroad.
  • Declaring private expenditures as business expenses: Personal costs are not tax deductible. However, some corporate expenses are.
  • Exaggerating your deductions: You must keep proof of your allowable deductions, such as receipts. Estimating them is not a good idea.
  • Understating purchases using cash: You must report every transaction to the relevant tax authorities if your firm is cash-based.

WHAT IS TAX AVOIDANCE?

Tax avoidance is a legal strategy that takes unfair advantage of tax code loopholes to evade the law’s original purpose. It implies developing innovative strategies or tools to avoid paying taxes while abiding by the law.

This may be achieved by making changes to the financial records that will lower the amount of tax paid and ensure that they do not violate any tax laws. Although it was formerly seen as lawful behavior, tax evasion is now considered criminal activity in certain situations.

Avoiding taxes just reduces, postpones, or occasionally eliminates the tax liability. This can be achieved by taking advantage of government incentives and programs, such as tax credits, privileges, exemptions, and deductions, among others, that lower tax responsibilities without causing legal problems or violations.

EXAMPLES OF TAX AVOIDANCE

  • Increasing your retirement contributions: Mandatory contributions to tax-advantaged retirement accounts lower your taxable income as you prepare for the future.
  • Making all the possible tax deduction claims: You can lower your taxable income by using tax deductions for eligible costs. Contributions to charity, medical costs, mortgage interest, and a portion of student loan interest are common deductions taxpayers can claim.
  • Using all available tax credits: If you satisfy certain requirements, tax credits can reduce your tax liability dollar for dollar. Some of the most popular credits reduce your taxes if you purchase an electric vehicle, pay for daycare, or pay for college tuition for your children.
  • Collaborating with a tax expert: A tax expert can ensure you lawfully reduce your tax obligation as much as possible.

Difference Between Tax Evasion and Tax Avoidance

Factors Tax Evasion Tax Avoidance
Meaning It is a dishonest and illegal method of lowering or getting rid of tax obligations. It is a legal strategy employed to lower tax obligations without breaking any laws.
Commonly Used For Tax concealment Tax hedging
Concept deliberate modifications to account that result in fraud Making the most out of the loopholes in the tax laws
Implications Use of approaches prohibited by the law Use of lawful and justified means
Act Criminal/punishable offense Legal and legitimate
Repercussions Imprisonment or penalty fee Deferment/evasion of tax liability

TAX ERRORS VS INTENTIONAL TAX EVASION

Having said that, tax authorities are aware that errors might occur throughout the filing process. In most cases, accidental tax errors are seen as carelessness as opposed to evasion. The standard procedure for handling tax negligence involves paying a reduced fine and any associated interest. These fines can be severe. 

What To Do If You Make a Mistake on The Tax Return

The best course of action is to fix any mistakes you made on your return as soon as possible. You can file an amended return and make any necessary adjustments using the relevant form.

You must speak with a tax expert if you have any questions about making changes to your return. They’ll be able to examine the particulars of your financial condition and provide you with guidance.

Consequences of Tax Evasion

Making a simple error on your tax return does not automatically make you a tax evader. Your intentions count. Here are the fines you may get if you actually plan to dodge taxes: 

  • A felony conviction on your record, 
  • Up to five years in prison and/or 
  • A fine of up to $2,500,000 (or $500,000 for businesses), and 
  • The cost of legal representation.

For Willful tax evasion, present time is a possibility, but there can be civil penalties such as: 

  • Underpayment penalties, 
  • Accuracy-related penalties, 
  • Failure to file penalties and 
  • Interest on overdue penalties.

Reach out to us at Relin Consultants – Leading Global Business Set Up Partners for further assistance.

FAQs

Must tax evasion be considered the same as tax avoidance?

Tax evasion and tax avoidance are frequently confused. Both are strategies to avoid paying taxes, although they differ significantly from one another. While tax evasion is strictly prohibited, tax avoidance is entirely lawful.

How are tax evasion and avoidance different from one another?

The use of legal strategies to evade paying taxes is known as tax avoidance. Meanwhile, tax evasion is the practice of avoiding paying taxes by unethical and fraudulent methods. The latter is a criminal offense, but the former is seen as entirely lawful.

How can tax avoidance be reduced?

It is possible to stop tax evasion by enforcing stricter tax rules and regulations, raising public awareness, lowering tax rates, etc. 

What are some common cases of evading taxes?

Taking advantage of tax credits, deductions, and exemptions; structuring corporate operations to reduce tax burden; and employing tax-efficient investment methods are common forms of tax avoidance.