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What is the difference between tax evasion and tax avoidance?

On Behalf of | Jun 16, 2022 | White Collar Crimes

Paying income taxes is the responsibility of all employees and businesses. However, according to the Internal Revenue Service (IRS), there were 593 people sentenced for tax evasion in 2020.

While it is legal to lower your tax liability through tax avoidance, tax evasion is illegal.

Lowering your taxes through tax avoidance

The government allows individuals and businesses to decrease their tax liability in certain circumstances. There are various avoidance strategies such as deductions, credits and adjustments. Some common ways to lower tax liability are through:

  • Child-care expense credits
  • Business expense deductions
  • Tax-free medical savings accounts
  • Higher education loan interest deductions
  • Home equity loans with tax-deductible interest

When used correctly, each option allows businesses and individuals to keep a more significant portion of their income instead of paying it in taxes.

Breaking the law with tax evasion

Tax evasion is more than making a miscalculation on your taxes. Evasion is the intent to hide taxable assets and avoid payment. This crime is punishable with minimum prison sentences and exorbitant fines. Additionally, you still have to pay the taxes due, plus penalties and interest to the IRS. Some examples of tax evasion are:

  • taking deductions that you do not qualify for, such as a child-care deduction when you do not pay anyone for those services
  • not reporting all of your income or accepting income on a cash basis
  • not filing your taxes or choosing not to pay taxes due
  • claiming personal deductions as business expenses
  • gifting income to relatives
  • hiding income through digital currency

Ensure you lower your tax expense by following only legal tax avoidance methods.