Understanding the Difference Between Tax Evasion & Tax Avoidance

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If you don’t understand the difference between tax evasion and tax avoidance, then you are not alone. According to a recent survey that polled voters in the United Kingdom, many respondents did not see a distinction between tax evasion and avoidance. In the YouGov survey, 59% of respondents identified tax avoidance as unacceptable, whereas just 32% believed it was legitimate. The primary difference between tax evasion and avoidance is that tax evasion is illegal, while avoidance is entirely acceptable and legal.

 

To get a better understanding of the difference between tax evasion and tax avoidance, take a look at this explanation from tax expert David Stewart.

 

Tax Evasion

 

Tax evasion is the illegal practice of not paying taxes and can result in penalties, such as jail time and fines. There are many forms of tax evasion, including not reporting income, reporting expenses that are not legally allowed, not paying taxes that are owed, or hiding an inheritance in a foreign account. While most people associate tax evasion with income taxes, it can also occur on any of the taxes a business owes, such as employment taxes and state sales taxes. People who practice tax evasion are doing so intently. To be committed of tax evasion, the IRS has to prove that you are purposely trying to hide money, claim too many deductions or under report your income.

 

Tax Avoidance

 

Tax avoidance, on the other hand, is not illegal. It is the practice of using legal methods to reduce your taxes as much as possible. You can practice tax avoidance by taking credits and deductions, such as EIC credits, student loan interest, retirement savings and mortgage interest. Businesses can get credits and deductions by donating to charities and building employee retirement accounts. Tax avoidance is completely legal if you pay the amount you reported.

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