Tax Avoidance or Tax Evasion
The difference between tax avoidance and tax evasion substantially comes down to legality. Tax avoidance is legal, but tax evasion can lead to serious consequences such as fines and prosecution. It is easy to accidentally cross the line from avoidance to evasion.
What is Tax Evasion
Tax evasion is an unlawful act in which one deliberately fails to pay their tax obligation. If caught, it can lead to criminal charges and substantial consequences. This applies to both not paying taxes and paying less than what is due.
The IRS can check if taxes are owed, even if taxpayers don’t submit necessary forms, because of information from other sources. A person is not considered to be guilty of tax evasion unless the failure to pay is deemed intentional.
Common examples of Tax evasion are:
- Not informing HMRC about the tax you owe, like business profits
- Keeping business off the books by dealing in cash with no receipts
- Hiding money, shares or other assets in an offshore bank account.
What is Tax Avoidance?
Tax avoidance is the use of tax laws to reduce the amount of taxes owed while remaining within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdictions that facilitate reduced taxes. Tax avoidance should not be confused with tax evasion, which is illegal.
Tax Evasion vs.Tax Avoidance
Tax evasion is illegal and involves not paying the proper taxes, while tax avoidance uses legal methods to reduce tax liabilities. Donating to a charity or investing in a retirement account like an IRA can help reduce taxes.
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