While both tax evasion and tax fraud sound like something the IRS would frown upon, these two terms are not necessarily synonymous. Tax evasion refers to the use of deceptive and illegal means to lower or circumvent your tax obligations. Tax avoidance, on the other hand, refers to the use of legitimate means to lower your tax obligation.
You can legitimately reduce your tax liability through tax avoidance
Tax avoidance basically refers to the use of legitimate tactics like taking credits, deductions, and adjustments to lower the amount you pay to the IRS in taxes. The goal of tax avoidance is to minimize your taxable income while maximizing your credits by controlling your income and deduction’s timings.
Common examples of tax avoidance may include:
- Choosing business financing options like home equity loans that come with tax-deductible interest.
- Engaging a tax expert to accurately project your income and recommend the best time to make certain financial decisions.
Both are legal, ethical methods of decreasing tax liabilities.
Tax evasion is illegal and actually amounts to tax fraud
When thinking about tax fraud, most people think of celebrities or large corporations cheating on their taxes or tax identity thieves filing fraudulent tax returns. However, tax evasion can also count as tax fraud. This makes tax evasion a criminal offense that can be penalized with a jail term or a hefty fine. Avoid claiming benefits for which you do not qualify and always make sure that your taxes are prepared using honest methods.
Common examples of tax evasion include:
- Fraudulently claiming zero income or under-reporting your income while filing your tax returns.
- Claiming personal travel expenses such as personal meals, clothing and souvenirs as business travel expenditures.
Understanding the difference between tax evasion and tax avoidance can keep you out of trouble with the IRS. Even what might seem like a small, unintentional error may turn into a costly mistake with severe consequences. Experienced legal guidance can help you differentiate tax evasion from tax avoidance, understand your rights and obligations, and counsel on how to handle your business tax situations.