There is a big difference between tax evasion and tax avoidance. Tax evasion is when you knowingly don’t pay your taxes, while tax avoidance is when you take legal steps to reduce your tax bill.
While there is nothing wrong with minimizing your taxes, you need to be careful not to cross the line into illegal activity.
The consequences of tax evasion
Tax avoidance and tax evasion are two distinct legal concepts with different consequences. Tax avoidance refers to lawful and judicious practices that aim to reduce a person’s tax liabilities through allowed deductions and credits as defined in the tax code. On the other hand, tax evasion is when an individual attempts to pay fewer taxes than what is legally owed. This can be done through criminal activities such as underreporting income, claiming false deductions or hiding funds in offshore accounts.
Tax avoidance has traditionally been seen as a legal way of minimizing an individual’s or business’s taxation burden. However, in recent years, this method has come under scrutiny as some corporations have used essentially legal loopholes to drastically reduce the income taxes owed to governmental entities. As these issues have come to light, governments worldwide have worked diligently to update their laws and regulations surrounding taxes so that such activities are forbidden or at least heavily discouraged.
While tax avoidance carries no legal penalties, tax evasion is considered a felony offense. If convicted, the guilty party may receive a fine of up to $100,000 ($500,000 for corporations), up to five years in prison or both.
If you are facing tax evasion charges, it is a serious matter and should not be taken lightly. Discuss your situation with someone familiar with tax laws because taking action early can help build a defense and minimize the potential damage of a criminal charge.