What’s The Difference Between Tax Avoidance And Tax Evasion?

The IRS requires businesses to comply with every aspect of the tax code. Evading taxes is a serious crime that can be punished by significant fines or even jail time. 

However, tax avoidance is perfectly legal. 

What is the difference, then, between tax avoidance and tax evasion? These phrases may sound similar, but they actually represent two very different practices.

Understanding the differences between tax avoidance vs. evasion will help you keep your tax burden as low as possible without breaking any laws.

WHAT IS TAX EVASION?

According to Investopedia, “tax evasion is an illegal activity in which a person or entity deliberately avoids paying a true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties. To willfully fail to pay taxes is a federal offense under the Internal Revenue Service (IRS) tax code.”

EXAMPLES OF TAX EVASION

The IRS has seen just about every kind of tax evasion strategy you can imagine. Some people attempt to commit tax evasion on a massive scale, leading to jail time, while others commit minor offenses.

Whether the offense is minor or major, there are always consequences for tax evasion.

Some forms of tax evasion include:

• Concealing assets or information to evade tax liability.
• Being paid for childcare “under the table.” You can receive payment for childcare services in cash, but you must report what you received.
• Hiding or ignoring overseas income. This includes any money you bring in from an overseas business or rental property.
• Avoiding taxes by banking via cryptocurrency. The IRS has laws about how to report cryptocurrency gains and losses.
• Not reporting the income you made from an all-cash business.
• Not reporting income from illegal activities. This is why people who are charged with criminal activities like illegal drug sales are often also held accountable for tax evasion.

WHAT IS TAX AVOIDANCE?

Unlike tax evasion, tax avoidance is legal.

Tax avoidance is the process of using legal methods to reduce your taxable income or amount of taxes owed.

Even something as simple as claiming all of your allowed tax deductions and tax credits is a form of tax avoidance, and pretty much everyone does this when they file their taxes annually.

The way to differentiate between tax evasion vs. tax avoidance is that tax evasion includes lying and hiding information. Tax avoidance is intentionally and legally structuring your business and personal affairs to have the least amount of taxes due as possible.

EXAMPLES OF TAX AVOIDANCE STRATEGIES

These are some of the most common ways that people utilize tax avoidance strategies:

• Invest in municipal bonds, as the interest on these is non-taxable.
• Start a business that creates more opportunities for tax deductions.
• Focus on long-term capital gains instead of short-term capital gains in order to keep investment tax levels as low as possible.
• Strategize the best way to max out your retirement benefits.
• Use a Health Savings Account (HSA) for medical expenses.
• Familiarize yourself with every available tax credit.

HIRING A CPA FOR YOUR SMALL BUSINESS CAN LEGALLY REDUCE YOUR TAX BURDEN

Doing your taxes yourself may seem like something that could save money since you’re not paying for tax preparation services. One of the biggest drawbacks to the “DIY” method of tax preparation for your small business is that you are bound to end up overpaying!

Nobody wants to pay more than they need to in taxes. Working with an experienced, knowledgeable small business CPA ensures that you have a plan to reduce your tax obligation without ever getting anywhere close to breaking any laws.

Chaliff + Associates Is Ready to Help You Decrease How Much You Owe in Taxes This Year

Instead of worrying about how to reduce how much you owe in taxes this year, focus on growing your business by bringing Chaliff + Associates on board.

We don’t want you to be held back in your growth. Having a trusted small business bookkeeping and accounting professional on your side can make all the difference in your bottom line this year!

Schedule a free consultation with a knowledgeable CPA in Memphis who is ready to support you while your business grows!