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Tax Avoidance vs Tax Evasion

calculator and a pen

What is Tax Avoidance vs Tax Evasion exactly?

There are two things you can be sure of. 

Death & Taxes. 

No one likes either. 

The US Tax system was predicated on the idea that every tax paying citizen would accurately and fairly assess and pay their tax burden for the good of the country and programs our taxes pay for.  This is, of course, not always the case. Moreover, People and companies pay as little tax as possible. Therefore, where those reductions start to get blurry is the line between tax avoidance vs tax evasion. These phrases are used interchangeably by some and pitted against each other as “acceptable” and “criminal” by others. Don’t be  confused. Not paying your share of your tax burden is a federal offense and IRS will seek out your business for criminal or civil investigation. 

Let’s dig into the etymology of the two phrases: 

Tax Avoidance 

Tax avoidance is the process in which a business uses legal ways to minimize taxes and after-tax income. These methods include but are not limited to the utilization of tax code, tax deferral and tax deduction. You should be aware that the IRS has limitations on these methods and could consider you criminally liable.

Examples of Tax Avoidance 

  • Claiming deductions, credits, or adjustments to your income in order to minimize business expenses.
  •  Setting up deferral plans such as 401K plans, IRA or SEP-IRA accounts in order to delay taxes to a later date 
  • Taxing certain tax credits for money you spent for legitimate purposes, for example providing employees with parental leave. 

Tax Evasion 

Tax evasion under anyone’s book is illegal, no matter how you slice it. This is the act of misreporting income or hiding income to avoid paying taxes altogether. There are multiple ways in which you can be not only criminally liable but convicted for tax evasion. 

Examples of Tax Evasion 

  • Underreporting your income or completely not reporting a source of income 
  • Inflating deductions 
  • Hiding any cash in off-shore accounts or simply not reporting any cash transactions. 
  • Providing false information of income and/or expenses to the IRS. 
  • Claiming personal expenses as business expenses 
  • Significantly underestimated taxes 
  • Claiming any deductions that do not have documentation to support 
  • Hiding assets 

If you choose to engage in the aggressive side of the tax avoidance tactics you can easily cross into the realm of criminal tax evasion.  Beware. One line item considered tax evasion can lead to a criminal tax evasion conviction. 

The bottom line is: to avoid criminal or civil investigation by IRS for tax avoidance or tax evasion, pay your taxes burden.  IF you are unsure of your chosen strategy’s legality, contact the attorneys at Milikwosky Tax LAw.  Our expertise in Government tax audits gives us the experience to assess your risk and mitigate any potential criminal tax exposure. 

Contact Milikowsky Tax Law today if you are unsure if you have crossed the line from tax avoidance to tax evasion!