Tax evasion vs. tax avoidance

On Behalf of | Feb 21, 2020 | Tax Evasion

For most working adults, the first quarter of each year means “tax season”. Many of you are probably hoping that your deductions and credits result in a hefty refund. While capitalizing on these legitimate items is beneficial, underpaying your taxes could land you in hot water with the IRS.

According to The Motley Fool, many people use the terms tax evasion and tax avoidance interchangeably. However, they are two very different matters. Tax evasion occurs when people use illegal measures to lower their tax bill. This can include:

  • Underreporting income
  • Purposely underpaying taxes
  • Claiming illegitimate dependents on a tax returns
  • Reporting fake business expenses
  • Concealing assets

For example, if you own your business and receive cash payments frequently, deliberately underreporting your income is tax fraud. Claiming more deductions than you legitimately have also constitutes tax evasion.

Tax avoidance refers to legal methods that help reduce your tax bill. These techniques include contributing to a 401(k) or IRA, deducting legitimate business expenses and claiming valid tax credits and deductions.

The complexity of the U.S. tax code means that sometimes mistakes are made. The difference between tax evasion and an error is intent. Tax fraud is committed when an individual intentionally misrepresents financial status to reduce the amount owed. If the IRS determines that the error was accidental, you may face a penalty, but not criminal charges.

Millions of people get audited every year without facing jail time, as the government convicts a very small percentage of people for tax crimes. However, for individuals who face tax fraud charges, the repercussions of a conviction can be severe. They include substantial fines as well as lengthy prison sentences.

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