Tax Evasion vs. Tax Avoidance

When deciding whether to deduct some of your expenses from your taxable income, you should consider the difference between tax evasion and tax avoidance. The first involves using legal means to reduce taxes, whereas the second involves abusing the IRS. In addition, tax avoidance should not be confused with illegal means. This article outlines the differences between tax avoidance and evasion, as well as how each differs from one another.

For instance, tax evasion is the deliberate misrepresentation of income to minimize taxes owed. For example, your tax attorney will tell you that some tax avoidance strategies are perfectly legal, such as contributing to retirement accounts and charitable donations. Others are illegal and involve hiding assets and income. However, both tax evasion and avoidance have different consequences. Both require planning and intent to reduce taxes. For instance, tax evasion involves hiding assets or avoiding paying the required amount of tax.

While tax evasion involves illegal methods, tax avoidance involves maximizing deductions, credits, and adjustments to minimize taxable income. Most taxpayers take deductions and credits as part of a regular tax return. However, there are other legitimate ways to minimize taxes and maximize your return. For example, if you've paid thousands of dollars in taxes but have only spent a fraction of that amount, you may postpone payment by contributing to your 401(k) or IRA. For institutions, there are SEP-IRA accounts and Roth IRAs that may be used to postpone taxes.

A common form of tax evasion is not reporting the income you receive from others. For example, paying someone under the table instead of providing them with a W-2 is considered tax evasion. Employers should report income to the IRS by paying payroll taxes on their employees. This is a serious violation of the IRS tax laws. In addition, the tax code prohibits using cash to pay someone. The IRS also requires that you provide a W-2 to your employee, otherwise it's considered tax evasion.

Whether you choose to deduct some expenses or claim them in your business, you should file tax returns on time. Make sure you claim business expenses only if they were really incurred. You should also report any suspicious activity to the IRS and seek the advice of a qualified tax professional. A tax lawyer can also help you avoid the legal penalties associated with tax evasion. It is always better to hire a tax lawyer than to risk being a victim of it.

In some cases, people who are trying to avoid taxes use methods such as creating a false social security number to avoid paying taxes. While this does not constitute tax evasion, it does result in a lower bill, as well as negative publicity. Mitt Romney's low effective tax rate in 2012 made headlines. Tax evasion, on the other hand, can result in fines and even jail time. Tax penalties vary according to the method used, the amount of income, and whether the charges are filed in civil or criminal court.