There are some people who are new to the field of penance and often use the word tax avoidance and tax evasion interchangeably. There is a huge difference between the two terms, and they are somewhat the opposite of each other.
Tax evasion is the act of hiding income or information from tax authorities — and it is illegal. On the other hand, tax avoidance is the act of legally reducing your taxable income. It is just like black and white. And if you don’t wish to land into trouble, you must pick the legal option.
Table of contents
- What is tax evasion?
- What is tax avoidance?
- The differences between tax evasion and tax avoidance
- Examples of tax evasion
- Examples of tax avoidance
- Summing Up
What is tax evasion?
Tax evasion is the act of resorting to illegal methods for hiding income or information from the IRS or any other tax authority. Tax evasion is a crime and may lead to fines, penalties and/or prison time.
What is tax avoidance?
Tax avoidance is the act of resorting to legal methods for reducing taxable income or the tax amount. Claiming allowed tax deductions and tax credits are common methods of tax avoidance. Similarly, you can invest in some tax-advantaged accounts such as IRAs and 401(k)s.
The differences between tax evasion and tax avoidance
The difference between tax evasion and tax avoidance can be condensed down to two major factors: lying and hiding.
“Tax avoidance is structuring your affairs so that you pay the least amount of tax due. Tax evasion is lying on your income tax form or any other form,” as said by Beverly Hills, the California-based tax attorney Mitch Miller.
For instance:
Investing money in a 401(k) or deducting a charitable donation are very good legal methods of reducing a tax bill (tax avoidance), as your activities are within the policies of the government
Hiding assets, income or information to dodge liability typically comes under tax evasion, and you may get penalised if you Resort to such methods.
Examples of tax evasion
Tax evasion does not need any elaborate schemes or dark-alley meetings. Here are a few scenarios of how it can take place more quickly than you’d think.
- Paying for childcare without recording it
- When you don’t show the reports of your income earned from overseas to escape taxes
- You are indulging in banking activities on unregistered online platforms or cryptocurrency. Cryptocurrencies are taxable. And sometimes taxpayers overlook cryptocurrency holdings that have increased in value.
- You are not reporting income from an all-cash business or illegal activities.
Examples of tax avoidance
If we talk about tax avoidance, there are numerous ways that can help you in reducing your tax bill.
- Remmitiing your funds on tax-advantaged or retirement accounts such as 401(k)s and individual retirement accounts are some common ways of reducing tax liability.
- You can read more about the various kinds of tax deductions and credits. You may even go for tax credits if you paid for your tuition fees, daycare expenses, medical expenses or sales tax. Any contribution made towards a charity or a donation can also help you avoid tax.
- You may find some ways of reducing taxes with the help of tax preparation software, or you may hire a tax advisor.
Summing Up
We understand that taxation can be a burden for the company sometimes. But, you must not resort to illegal methods other than tax avoidance. Any malpractice should not be carried out by businesses firm as legal action can be taken against them by the federal government. The correct solution to reduce taxes is to claim deductions and go for schemes that help in reducing the tax liability of the firm. If you feel that you don’t have much right idea about this, you can go for hiring an accountant.
If you feel that filing tax returns and paying taxes is quite overwhelming for you, or you are looking for corporate tax accountants, you can reach out to us at 123financials, and we will be more than happy to help you out. Please send us your requirements now and get the quote.
