What’s the difference between tax evasion and tax avoidance?

Taxes are, without a doubt, a necessary source of funds that the government needs to operate, fund public services and maintain the country’s infrastructure. However, nobody wants to pay more taxes than they need to.

As long as you do things correctly, there’s nothing wrong with taking steps to reduce your personal or business tax liabilities. That means having a clear understanding of the difference between tax avoidance and tax evasion so that you can make appropriate choices.

Tax evasion is illegal

Typically, tax evasion involves deliberately underreporting your income, inflating deductions and expenses, hiding money in offshore accounts or engaging in other kinds of illicit, illegal actions. It can also involve things like paying employees under the table, failing to report cash transactions, hiding cryptocurrency in secret accounts and pretending like your overseas income doesn’t exist. Tax evasion involves intentional deception, and it’s a criminal offense.

Tax avoidance is not illegal

By comparison, tax avoidance is a legal, strategic approach to minimize tax liabilities by using lawful methods that fit inside the boundaries of tax regulations. It involves leveraging available tax deductions, credits and exemptions to reduce the amount of tax owed through the use of things like tax-advantaged retirement accounts or making use of gifts to reduce the value of your estate for your heirs.

Tax avoidance is a routine practice in financial planning, employed by individuals and businesses to optimize their tax burdens while remaining complying with the law. It’s perfectly acceptable to reduce your tax burden where you can – just be smart about it: Experienced legal guidance can help you learn more and avoid disastrous mistakes.