Tax Evasion vs. Tax Avoidance: Is There a Difference Between the Two?

Tuesday, April 1, 2014, 1:00 AM | Leave Comment

The biggest difference between tax avoidance and tax evasion is that one is legal and the other is not. Reducing or completely avoiding tax liability is recognized as a taxpayer’s right by the Internal Revenue Service (IRS). Tax evasion, however, is a crime that is punishable by law; it can result in fines of up to $250,000 and imprisonment for up to five years.

Tax Evasion vs. Tax Avoidance - Is There a Difference Between the Two

  • Examining Illegal Tax Evasion Methods

    The IRS provides guidance on reporting tax fraud and examples of tax evasion for those interested in learning the difference between the two.

    Here’s a rundown of their guidelines and advice:

    • False Deductions or Exemptions

      Inflating business or personal expenses in order to claim false deductions is illegal. Each exemption reduces taxable income, and each taxpayer is entitled to one as an individual. Taxpayers can claim dependents as exemptions as long as the reported number of them is accurate.

    • Unreported Income

      Income is the basis for taxation, including wages, salaries, tips, Social Security benefits, interest and dividends, alimony, child support and any other contributing source.

    • Nonpayment of Tax

      Refusing to pay a tax liability creates serious legal consequences.

    • False or Altered Documents

      Falsifying or altering documents that reflect income for a tax year may include something as simple as backdating a check, and it is illegal.

    • Failure to Withhold

      Evading income tax is one of more common forms of tax evasion, but it can occur when businesses fail to withhold federal income tax from an employee’s paycheck.

  • Using Legal Tax Avoidance Methods

    Judge Learned Hand is often quoted for his opinion that no one “owes any public duty to pay more than the law demands”. A taxpayer needs to understand the regulations, and software packages as well as professional tax preparers offer guidance on making legal deductions.

    Adjustments to income that lower tax liability include deductions like these:

    • contributions to an Investment Retirement Account or 401K
    • a portion of losses in the stock market
    • alimony payments
    • a limited amount of interest on student loans
    • moving expenses in certain circumstances
    • a portion of self-employment tax
    • educational tuition and books up to a certain amount

By scrupulously following the letter of the law, a taxpayer can take advantage of the tax code to avoid paying too much.

Valid records and saved receipts can provide evidence of legal transactions that may justify making legitimate deductions.

Tax evasion is a far different process that may involve hiding income, claiming false deductions or using other illegal tactics that are punishable by law.


This article was written by Dixie Somers, a freelance writer who loves to write for business, finance, women’s interests, and technology. Dixie lives in Arizona with her husband and three beautiful daughters.

Information for this article was provided by professionals of The Defence Lawyer, a firm of DUI lawyers in Edmonton who also assist in tax evasion cases, commercial crime cases, and other criminal defense cases.

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