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

When tax time rolls around, many Americans seek to reduce their tax liability, meaning decrease the amount they owe to the government. To do this, some might engage in tax avoidance, while others might engage in tax evasion. The difference between the two methods is that the former is legal and built into the Tax Code and the latter is illegal and can result in severe consequences.

In this blog, we'll discuss the distinctions between tax avoidance and tax evasion and the potential penalties a person may face.

What Is Tax Avoidance?

As mentioned earlier, tax avoidance is a legal method to reduce tax obligations. To minimize income taxes owed, the taxpayer can take advantage of the credits, deductions, and income adjustments provided in the Internal Revenue Code.

Ways a taxpayer can engage in tax avoidance include, but are not limited to:

  • Donating to charity
  • Investing in a retirement account (either through an employer or individually)
  • Taking the child tax credit
  • Taking the mortgage tax deduction

What Is Tax Evasion?

Tax evasion is an illegal method for underpaying or failing to pay taxes. Taxpayers who engage in this type of conduct often fail to report income earned – whether legally, such as through side jobs, or illegally, such as through selling stolen property. Tax evasion can also be accomplished by inflating deductions, such as falsely reporting home office expenses.

What Are the Penalties for Tax Evasion?

The Tax Code is complex, and some taxpayers might make innocent mistakes when reporting income or deductions. Such cases might not be pursued as tax evasion because the act wasn't willful.

When underreporting or failure to report accurate information becomes a crime is when it is done intentionally.

For instance, suppose Richard is a teacher who tutors students on the side. He charges a fee for his tutoring services, but when tax time comes around, he purposely fails to report the income he earned from his side business. Richard's conduct is considered tax evasion.

Tax evasion is a serious federal crime that can carry harsh penalties.

If a person is found guilty, they may face:

  • A fine of up to $100,000 ($500,000 if the defendant was a corporation), and/or
  • A prison sentence of up to 5 years

In addition to the criminal penalties, if a person or corporation is convicted of tax evasion, they may be required to pay back taxes owed.

If you're being investigated for or have been accused of tax evasion, you need a lawyer on your side who can fight the charge. For aggressive defense in Minneapolis, contact Brockton D. Hunter P.A. at (612) 979-1112 today.