Difference Between Tax Evasion and Tax Avoidance

Nobody likes to pay taxes, not you not me. But taxes are the law so you have to pay them or you will be in trouble with the law. Both the terms tax evasion and tax avoidance are often used interchangeably, but both of them are totally different concepts and are different in nature. One is legal while the other one is illegal.

Tax Evasion and Tax Avoidance are two of the most common terms used when it comes to taxpayers’ manners for tax reduction. For both of them sales tax filing is the important and essential part of it. Before learning the difference between them, lets know both the topics individually first.

 

What is Tax Evasion?

Tax Evasion is basically using an illegal means or ways for people to avoid paying the taxes. Tax Evasion is considered to be a felony and it is criminal in nature. Most of the times, tax evasion involves hiding and misrepresenting of their income to get out of paying the taxes. They might do that by inflating the deductions without any proof, underreporting of income, hiding money in some offshore accounts, etc.

Examples:

Some of the practices which are considered to be tax evasion or tax fraud are as follows:

• Under-reporting of income
• Not reporting an income source
• Underpaying taxes that are owed
• Keeping two sets of books
• Claiming personal expense as business expense

What is Tax Avoidance?

Tax Avoidance is basically a legitimate way of minimizing the taxes and maximizing the after-tax income. The taxpayers’ use a tax code method of do the tax avoidance while doing their sales tax filing or other tax filing. Most of the times, businesses avoid taxes by taking all the legitimate deductions and tax credits. Though the shelter income is then used by them for setting up employee retirement plans or other legal means which are set up under the Internal Revenue Code or state tax codes.

Examples:

• Taking legitimate tax deduction to minimize business expenses
• Setting up tax deferral plan
• Taking tax credits for expenses

Difference between Tax Evasion and Tax Avoidance:

Below mentioned are the main difference between a tax evasion/tax fraud and tax avoidance:

Tax Evasion	Tax Avoidance
Tax Evasion is illegal in nature.	Tax Avoidance is legal in nature.
Tax Evasion means illegal way for not paying the taxes.	Tax Avoidance means legal way to minimizing the taxes.
How does Tax Evasion happen? Not reporting income Reporting more expenses than you earn your income Not paying the taxes owed Understating tax amount owed	How to do Tax Avoidance? Legitimate tax deductions Setting up tax deferral plans Taking tax credits
Examples: An employer or business owners who fail to withhold federal income tax or the FICA taxes from the employee paychecks. An employer who withholds the taxes and fails to report and pay these payroll taxes as well. Hiring someone outside the payroll service. Paying your employees in cash and failing to report most of these cash payments. Failing to file the tax returns and filing a fake one.	Examples: Businesses use tax code to minimize their business expense while filing for tax. They use that amount of money for the benefits of their employees.

So, these were some of the most common difference between tax evasion and tax avoidance. Both are used interchangeably but are different from each other.