Tax Avoidance vs Tax Evasion: Stay on the Right Side of the Law

Tax avoidance is totally legally. Tax evasion, on the other hand, will land you in jail. They might sound similar, but there are dramatically distinct practices. Toady we’re going to look into the main differences between tax avoidance and tax evasion in order to help you stay on the right side of the law.

Tax Avoidance vs Tax Evasion

What is Tax Avoidance?

Tax avoidance is the legal practice of avoiding behaviors that can lead to paying more in taxes. Normally business owners are the people who practice tax avoidance. There are normal, legal avenues for reducing the amount of taxes a business or individual will pay.

Notably, charitable donations are a great way to keep your taxable income lower. Normally, a tax adviser can give a person or business tips in how to keep their taxes low while staying within the bounds of the law. A good tax adviser will never advise you to commit tax evasion.

Tax Evasion

Conversely, tax evasion is a serious crime. If you think the IRS won’t notice you trying to misrepresent your income to evade taxes, you’re wrong. Unlike tax avoidance, tax evasion is characterized by lying, manipulating, deceiving or otherwise misrepresenting one’s finances. This type of crime has a number of forms, but most commonly occurs when people misreport their income.

Common Types

A few common tax scams involve business ownership. They could include reporting personal expenses as business expenses, thus taxing them differently. Having two sets of accounting books and reporting transactions from one but not the other is another.

Transferring assets to income, or otherwise hiding assets, is one way wealthier individuals avoid taxes. Finally, claiming deductions you’re not entitled to, or otherwise lying about deductions, is another common form of tax scam.

In short, don’t lie on your taxes. Al Capone, one of the savviest and most dangerous gangsters of all time, went down on tax evasion. If you think you won’t, ask yourself: am I savvier than Al Capone?