Is There a Difference Between Tax Avoidance and Tax Evasion? Yes. While tax avoidance and tax evasion both deal with not paying taxes, one is legal while the other is not. As these terms sound similar, they are often used interchangeably and may cause confusion among taxpayers. Hopefully, as a tax attorney, I can clear up any misconceptions that readers may have.
What Is Tax Avoidance?
Tax avoidance is the act of using the existing law to reduce the amount of money that you give the government each year. Examples of tax avoidance include carrying over losses from previous years or taking a deduction for mortgage interest. These are perfectly legal acts that the IRS generally won’t challenge if they appear to make sense within the context of your return.
What Is Tax Evasion?
Tax evasion is the act of not paying what you legally owe to the federal government. Examples of tax evasion include not filing a tax return even though you made money in the past year or claiming deductions that you aren’t entitled to. A person may also commit tax evasion by failing to claim money overseas or taking other steps to hide taxable income or other assets from the IRS.
What Are the Penalties for Tax Evasion?
Those who are convicted of tax evasion could spend time in jail. In addition, any back taxes plus penalties and fines will need to be paid to the IRS. In some cases, the government may seize assets or take other measures to obtain payment of past due balances.
While you should never pay more tax than you owe, it is never a good idea to break the law either. The IRS has several years to come after a person if it believes that fraud has taken place. If anyone has any questions about their income tax situation, don’t hesitate to reach out to me.