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Do you know the difference between tax avoidance and evasion?

On Behalf of | Oct 14, 2020 | Tax Law

The difference between the wage your employer pays you and your actual take-home income can be frustrating. Many people pay 20% or more of their average weekly income in various taxes.

When it is time to file your tax return, it is normal and even reasonable to want to limit how much you pay and possibly get some of your tax payments back as a refund. Before you try to manipulate the system to your own advantage, make sure you know the critical difference between tax evasion and tax avoidance.

Tax avoidance is legal for individuals and businesses

There are all kinds of laws meant to help people reduce their tax liabilities. You could substantially diminish your taxable income through clever accounting, such as writing off home office spaces and other expenses to increase your deductions.

You could also potentially make massive contributions to nonprofits and charitable organizations to reduce your taxable income. Doing so is legal and is relatively common.

Tax evasion usually involves intentional misrepresentation or fraud

Unlike tax avoidance, which harnesses current tax code for the benefit of an individual filer, tax evasion involves misrepresenting individual or business circumstances to avoid your responsibilities. Tax evasion often requires intentionally lying on paperwork or doing things that you know potentially violate the law.

Attempting to hide assets, not claiming funds in international bank accounts or increasing the number of dependents that you claim when you file your taxes are all examples of fraud that could leave you vulnerable to an audit.

If  you struggled to understand the fine line between evasion and avoidance and now face an audit or criminal charges related to your taxes, carefully reviewing your tax and income records can be the first step toward planning your defense strategy.