How Does Tax Evasion Differ From Tax Avoidance?
Tax evasion and tax avoidance are two distinct concepts with two very different consequences. While tax avoidance uses legal measures to reduce a taxpayer's liabilities, tax evasion requires the use of illegal methods to conceal income or information from the IRS.
Tax avoidance is legal and it entails all available tax credits, deductions, and other adjustments to income that you are eligible for. Tax avoidance can help you lower your tax bill while increasing and maximizing the amount of taxable income you keep.
Your taxable income is reduced by deductions and adjustments. Credits subtract from the amount you owe to the IRS. When it comes to deductions, you have an option. You can either take the standard deduction or itemize your deductions but you are not allowed to do both. You should choose the option that reduces your taxable income the most.
What Is Tax Evasion?
Tax evasion is an illegal activity in which a person or company knowingly avoids paying their true tax liability. Those who are caught avoiding taxes are subject to criminal charges and face severe fines of up to $100,000, 5 years in prison, and legal fees and penalties. Companies might face a fine of up to $500,000.
Both the illegal nonpayment and illegal underpayment of taxes are considered a method of tax evasion. Failure to pay taxes on time may result in criminal proceedings. It must be determined that the avoidance of taxes was a willful act on the part of the taxpayer before charges can be levied.
What Methods Are Considered Tax Evasion?
Here are a few situations in which tax evasion is accounted for.
A form of tax evasion is intentionally under-reporting income, where taxpayers don't report income they receive in cash, assuming that it wouldn't be able to be traced.
An alternative method of tax evasion is intentionally over-reporting deduction, where taxpayers add their own personal costs to their expense deduction.
Another form of tax evasion is falsely allocation of income, where a taxpayer tells their clients and customers to make out the check to another taxpayer who is in a lower tax bracket.
Improperly claiming tax credits or exemptions is a form of tax evasion as well, where a taxpayer claims earned income tax credit based on them living with their son/daughter but the son/daughter actually lives with the taxpayer's ex-spouse instead.
One more method of tax evasion is concealing assets, where a taxpayer has a foreign bank account but doesn't report it to the IRS or pay any taxes on the interest they earned from that account.
Bottom line is, that nobody wants to pay more tax than they already have to, therefore individuals oftentimes look for ways to lower their federal tax bill. Those reductions can take the form of tax evasion and tax avoidance but the difference is one is legal and the other is not.
Resolve Your Tax Bills
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