Although both sound like something the IRS would frown upon, tax evasion is different than tax avoidance. Tax avoidance refers to using legitimate methods to lower your tax liability, while tax evasion is reducing your tax liability through deception and other illegal means.
While some taxpayers knowingly initiate tax evasion tactics on their own, others fall for the promise that a shady company can reduce their taxes owed. The IRS often catches these tax scheme promoters and sometimes finds the clients guilty of tax evasion as well.
Understanding the difference between tax avoidance and tax evasion can help keep you out of trouble with the IRS. Keep reading to learn more about the difference between tax evasion and tax avoidance and how an experienced tax attorney may be able to help clear up misunderstandings with the IRS.
Tax Avoidance Is A Legitimate Way to Reduce Tax Liability
Tax avoidance is merely taking the deductions, credits, and adjustments for which you are legally eligible. Most taxpayers do it, and there is nothing wrong with finding legitimate ways to maximize your tax return or minimize your tax liability. After all, the government created these methods to help qualified taxpayers reduce their tax liability.
Examples of Tax Avoidance
Permissible methods of minimizing your taxes typically involve minimizing taxable income, maximizing credits and deductions, or controlling the timing of income and deductions. Specific examples include:
- Deducting business expenses related to your personal vehicle, laptop, or cell that you use heavily for work
- Increasing the amount of money you put in tax-deductible or tax-free accounts such as HSAs, IRAs, 401Ks, and even some college plans
- Choosing financing options such as home equity loans that have tax-deductible interest
- Working with a tax expert to accurately forecast your income and determine the best time for certain tax and financial actions
Tax Evasion Is Illegal and Counts as Tax Fraud
When most taxpayers think of tax fraud, they think of large corporations cheating on their taxes or tax identity thieves filing fraudulent tax returns, but tax evasion is also a type of tax fraud. Tax evasion refers to intentional, illegal attempts to not pay or underpay taxes.
Examples of Tax Evasion
Examples of tax evasion often include claiming deductions and credits for which you are not legally eligible, but there are also a variety of methods.
- Establishing a fake religious organization to evade paying taxes and claim tax-deductible “donations”
- Fraudulently filing a tax return claiming zero income for the year or underreporting your income
- Allocating income to a relative in a lower tax bracket
- Claiming personal travel expenses (souvenirs, personal meals, an upgrade to first class, etc.) as business travel expenses
As we mentioned earlier, some taxpayers end up guilty by association when their underhanded tax preparer gets arrested for tax evasion.
Tax evasion is a criminal offense. The IRS penalizes tax evasion with hefty penalties and jail time. Never claim benefits for which you do not qualify and always ensure that anyone who prepares your taxes uses honest methods to avoid and not evade tax liabilities.
Can I Be Found Guilty of Tax Evasion for a Mistake?
Don’t worry; the IRS distinguishes between fraud and mistakes. To charge you with tax fraud, the IRS Criminal Investigation Division must prove that you willfully committed an offense. Making a mistake on your taxes may result in fees, but should not result in evasion charges.
However, if your tax preparer is the one responsible for the evasive action, you will have to prove that you were unaware of the tactics by which they were decreasing your tax liability. This can be difficult to do and made more complicated if your preparer told you what they were doing, but you didn’t realize the illegality of their methods.
S.H. Block Tax Services Can Help Clear Up Misunderstandings With the IRS
If you have any questions about tax avoidance and evasion or need help dealing with the IRS, contact our tax experts today for answers. Getting in contact with the IRS to explain a misunderstanding or issue can be difficult. Our tax attorneys can help resolve your tax problem.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.