Understanding the difference between tax avoidance and evasion

On Behalf of | Mar 15, 2023 | Tax Evasion

Taking steps to reduce the taxes you owe is not necessarily a crime. There are many legal avenues available to minimize tax liability.

There is a difference, however, between tax avoidance and tax evasion. The penalties for a tax evasion conviction can be severe.

Tax avoidance and examples

Tax avoidance consists of using legitimate methods to lower taxable income. A good example of avoidance is taking advantage of the allowed tax credits and deductions, such as the child tax credit. Other methods include contributing pre-tax earnings to a tax-advantaged retirement plan, deducting home equity loan interest and maximizing work deductions.

Tax evasion and examples

Tax evasion is the willful use of illegal methods to avoid tax payment or assessment. One example of tax evasion is to transfer or hide assets. Other examples include underreporting income, taking deductions or reporting expenses that did not occur, deliberately failing to pay taxes owed and not filing a tax return.

Penalties for tax evasion

The penalties for a tax evasion conviction can be severe. Even if not convicted of tax evasion, an individual who does not file a return or pay the taxes owed will be responsible for fines and interest on the amount of unpaid taxes.

If found guilty of tax evasion, an individual faces imprisonment for up to five years and stiff fines. Additional consequences for unpaid taxes include Social Security garnishments, tax liens on property and property loss.

For a conviction of tax evasion, the prosecution must prove that the tax return was fraudulent or false and that the taxpayer purposefully and knowingly committed tax evasion.

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