Tax Avoidance Vs Tax Evasion
Are tax avoidance and tax evasion same? If you think they are same, behold as they are two different terms with different meaning.
Here is a brief definition of the both terms ‘tax avoidance’ and ‘tax evasion’.
What is tax avoidance?
Tax avoidance is the legal practice of minimising taxes by using different methods approved by the law without deliberate deception. It needs planning to make strategies for minimising taxable income, tax deductions and tax credits, and controlling the timing of income and deductions.
It often involves artificial transactions to create a tax advantage. Businesses usually take all deductions and covers income from taxes by setting up employee retirement plans legally to avoid tax liabilities.
What is tax evasion?
Tax evasion is the illegal practice of escaping taxes. Those who do not report illegal income, expenses and do not pay taxes owed for reducing their tax liability are called tax evaders. This whole act is considered as crime.
Businesses can also practice tax evasion on state sales taxes and on employment taxes. As a matter of fact, business can practice tax evasion on all the taxes it owes.
The IRS notes the following as illegal:
• Deliberately not reporting income
• Making fake entries in books and records
• Claiming sham deductions on a return
• Declaring private expenses as business expenses
• Hiding the source of income or properties
• Concealing the true state of tax affairs to authorities
Legality is one word that differentiates tax avoidance from tax evasion. There is a very thin line between avoiding and evading tax. The illegal exploitation of the evasion can even put you in prison. So, you need to be very careful not to cross that thin line separating the two of them.
To know more updates on tax avoidance and tax evasion, you can go through previous posts.