Tax Avoidance vs. Tax Evasion | Differences and Legality

Tax Avoidance vs. Tax Evasion | Differences and Legality

If you lower your tax bill under false pretenses, you will run into issues. It’s time to look at tax avoidance vs. tax evasion so you can avoid breaking the law. You may take legal steps toward avoidance to ensure maximum after-tax income.

On the other hand, if you fail to pay your tax bill or underpay, you’ve crossed over into illegal territory. That’s called tax evasion. Today, we’ll dive into the difference between tax evasion and tax avoidance.

If you have questions or concerns about the tax evasion and avoidance difference, feel free to contact the Law Offices of Seth Kretzer today for more help. We can clarify, and we can assist you with any legal circumstances you may face.

What Is Tax Avoidance?

There is certainly a distinction between tax avoidance and tax evasion. Tax avoidance is the legal minimizing of taxes, in which one employs methods in line with the tax code.

For instance, businesses participate in tax avoidance by taking deductions and by protecting their income with employee retirement plans and more. The important part is being sure you’re in line with the state tax codes and Internal Revenue Code.

Is Tax Avoidance Legal?

When looking at tax evasion versus tax avoidance, note that tax avoidance is legal. In fact, you don’t have to cheat the system to lower your tax bill. It’s quite common for people to pay more federal and state income tax than is required because they do not understand tax laws and fail to keep good records.

You can accomplish tax avoidance if you claim your permissible credits and deductions. Perhaps you have heard of “tax shields” before. These protect against high taxes, and they represent the tax avoidance strategies. Keep reading to discover more.

Tax Avoidance Examples

To make things clear, here is a short list of types of tax avoidance. Please see tax codes for more comprehensive details.

  • Lower your business tax bill by taking deductions to minimize your business expenses.
  • Set up a 401(K), IRA, or SEP-IRA to delay your taxes when a later date is preferred or necessary.
  • Take tax credits like the Work Opportunity Tax Credit for spending money for legitimate purposes (hiring workers in your company).
  • Increase your retirement savings with your employer with your pre-tax earnings. Even if you don’t have an employer, you can open an IRA account with tax-deductible contributions.
  • Use home equity loans, which have the bonus of tax-deductible interest.
  • If your healthcare deductible is high, consider an HSA (health savings plan) because the money you contribute to that plan is tax-deductible. Best of all, whatever you don’t use is rolled over, and you can continue to use the funds for medical expenses.

If you’re at a legal crossroads regarding tax evasion or avoidance questions, get representation from federal criminal defense attorney Seth Kretzer today.

What Is Tax Evasion?

difference between tax evasion and tax avoidance
Tax avoidance vs. evasion represents a huge distinction. Now, we’ll talk about the illegal side of things. Putting it simply, tax evasion is defined as not paying the taxes that you as a U.S. citizen owe the government.

Is Tax Evasion Legal?

When examining tax avoidance and tax evasion, know that tax evasion is a crime. If you’re found guilty of evasion, then you should know that penalties range from fines to serving jail time. The severity of the punishment is determined by whether you have intentionally cheated the government or your underpayment was an accidental oversight or calculation error.

Tax Evasion Examples

Seek advice from a tax professional and explore your legal options. Do not take part in any of the following:

  • Do not underreport your income. If you earned income on tips, report them.
  • Do not take unearned deductions. Don’t claim expenses you did not incur.
  • File a return. If you make money, the IRS expects you to file. You can’t hide from them, so don’t attempt it.
  • Do not underpay taxes deliberately. You need to file your taxes and pay them. In fact, a failure to pay is penalized just as harshly as if you’d never filed at all.

What’s the Difference Between Tax Evasion and Tax Avoidance?

tax avoidance and tax evasion
So, what’s the difference between tax avoidance and tax evasion? You know by now which one is legal (avoidance) and which one could land you with hefty fines and even a jail sentence (evasion). You’ve seen the examples of tax evasion and tax avoidance above.

Trust the Attorneys at the Law Offices of Seth Kretzer

If you or a loved one has been accused of tax evasion, you will, of course, need to work with an appellate lawyer. Do not delay a minute longer. Nationwide tax fraud lawyer, Seth Kretzer, is here for you!

Contact us today to schedule an appointment to learn about our services and experience. We’ll get you the solid defense you need.

Phone: 713-775-3050
Fax: 713-929-2019
Houston, TX 77002
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