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What is the Difference Between Tax Evasion and Tax Avoidance?

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  • Written By: Mary McMahon
  • Edited By: C. Wilborn
  • Last Modified Date: 18 November 2016
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Tax evasion and tax avoidance are both practices designed to reduce the amount people pay in taxes. The difference is that one involves legal means, while the other is illegal and is a form of tax fraud. Professionals such as attorneys and accountants who assist people with illegal means of reducing tax liability can be penalized along with the taxpayer.

In tax avoidance, people take advantage of the tax law to find ways to reduce their total tax liability. This is entirely legal and many people practice is every year at tax time. Using the services of a sharp tax attorney or tax accountant can save people significant amounts of money on their taxes. With tax avoidance, taxpayers seek out tax credits, writeoffs, and other means of cutting down on their tax liability.

The tax code is constantly being updated. Tax professionals keep up with changes to the law so that they can advise their clients on the best ways to reduce the amount of money they owe. With tax avoidance, people declare all of their income as required by law and submit other financial documents as needed, and the means used to reduce their tax liability are clearly documented on their tax returns.

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With tax evasion, people avoid taxes not by scrupulously following the tax code, but by hiding or moving income, making false claims on a tax return, and utilizing other illegal means to pay less on their taxes. Some tax evaders avoid paying taxes altogether; people who work as independent contractors or receive monies under the table for their work, for example, may simply not declare this income and thereby avoid paying taxes on it.

The line between tax avoidance and tax evasion can sometimes be very fine. There are some things people can do with their money that are perfectly legal under the law, but could be read as attempts to evade taxes. Moving funds suspiciously and with no clear reason or documentation can attract the attention of tax authorities. Once tax authorities suspect someone of tax evasion, they will scrutinize that taxpayer closely.

Notable members of the criminal community, including no less a figure than infamous gangster Al Capone, have gotten in trouble for tax evasion. Sometimes, it is difficult to pinpoint illegal activity and prosecute people for activities such as Mob involvement, but those individuals can be thrown in jail for failing to pay taxes. In the eyes of the Internal Revenue Service, even income acquired from illegal activities needs to be declared and taxed.

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sunshined
Post 4

I have a distant relative who always bragged about how much money he made. He drove expensive cars and was always traveling to different places.

Nobody really knew for sure what he did, but nobody was surprised when he had to hire a tax evasion attorney.

This all happened when I was younger and didn't really understand what was going on. Now that I understand this better, I can imagine it was quite a scandal in the family.

He even spent a few years in prison for criminal tax evasion. Because we were never really that close to his family I have no idea what he is doing now, but evading taxes eventually caught up with him.

golf07
Post 3

I have a neighbor who has more than one side business. Much of the money he collects is in cash or under the table. I don't know much about his tax situation, but I would be very surprised if he reports all the income he receives.

I think he has evaded paying taxes for many years, but has just been lucky enough to never be caught. I also think he moves money around from one business to another so it doesn't look like one business is very profitable.

This is nothing I can prove but I have never really been able to trust him as a neighbor. I just wouldn't be surprised if he handled his money and taxes in the same way.

julies
Post 2

I remember when I was out of college, single and had one job. Doing my taxes was very fast and simple, and I did not have a problem figuring out how to do them. My life is much more complex now and it would be a nightmare to keep up with my taxes on my own.

I own some real estate and because I have more than one business, I am able to avoid paying taxes that an individual may have to pay. When I say I am avoiding taxes, it sounds like this is illegal, but everything I do is allowed by law.

It seems like a week doesn't go by where I don't read about someone being convicted of tax evasion. This is completely different, and most people who do this don't get away with it forever.

Mykol
Post 1

I try to avoid paying any kind of tax I don't have to pay, but this is always done legally. I have a tax accountant who is very current on the tax laws and which taxes I can avoid or limit because of certain deductions.

I do put a lot of trust in his knowledge and ability, and haven't questioned whether he is honest or not. I would be very surprised and frustrated if I ever found out he was not on the up and up.

Paying taxes has become so complex that I think it is hard for the average person to really understand all of it. It can be expensive to pay someone else to take

care of this for you, but in the long run I figure it is cheaper than trying to figure it all out myself.

I have been able to significantly reduce the total amount of tax I pay every year by legally avoiding some taxes. These are situations that I would have never known about on my own.

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