Difference Between Tax Evasion and Tax Avoidance

Tax Evasion vs Tax Avoidance
 

As tax avoidance and tax evasion are both methods used by individuals and businesses to minimize or completely avoid the payment of taxes, one should be able to recognize the difference between tax evasion and tax avoidance. While these concepts may sound similar to one another, there are a number of differences between tax evasion and tax avoidance. Tax avoidance is a legal method used to reduce taxes, whereas tax evasion is illegal and can lead to criminal prosecution. The article takes a closer look at these concepts and explains the similarities and differences between tax evasion and tax avoidance.

What is Tax Avoidance?

Tax avoidance is a mechanism used by individuals and businesses in order to avoid the payment of taxes. Tax avoidance is done by complying with the rules and regulations, yet at the same time by finding any loopholes in the laws of taxation and taking advantage of such shortcomings. Tax avoiders will find a way to exploit the taxation system and laws legally in order to avoid paying or reduce the amount of taxes. Examples of tax avoidance includes tax deductions, artificial transactions created with the aim of gaining a tax advantage, changing business structures to reduce tax rates, establishing companies in countries that offer reduced tax rates also known as tax havens, etc. Even though, tax avoidance is legal, in some instances it may be seen as unethical in that the aim of tax avoidance is to find shortcomings of the tax system in order to reduce taxes paid.

What is Tax Evasion?

Tax evasion is an illegal mechanism used in order to avoid the payment of taxes. Tax evasion goes against any taxation laws set in the country and is done in an unfair manner. Tax evaders can be imprisoned for illegal activities that they undertake to avoid the payment of taxes. Tax evaders mislead authorities by concealing their financial information through practices such as window dressing accounts in order to show low taxable income figures. Tax evasion can result in large financial penalties, payment of the entire amount of taxes due and may even result in criminal prosecution.

What is the difference between Tax Evasion and Tax Avoidance?

Tax avoidance and tax evasion are both mechanisms used in order to avoid or reduce the amount paid as taxes. The main difference between tax evasion and tax avoidance lies in that tax evasion is illegal, whereas tax avoidance is a legal method used to reduce tax payments that at times can be unethical in nature. Examples of tax evasion are untrue financial reporting, window dressing of financial accounts, hiding assets and income, claiming false deduction, avoiding payment of taxes due, etc. Tax avoidance is the minimization of taxes by using loopholes in the law and other tax reducing techniques that are approved by the IRS. Since tax evasion is illegal tax evaders can be imprisoned or compelled to pay all taxes due to avoid penalties or prosecution. Tax avoidance seeks to find methods to restructure business, accounts and transactions to reap the largest tax benefits. Individuals and firms seek the help of lawyers and financial professionals to conduct tax planning activities in order to identify legal methods to minimize taxes paid.

Difference Between Tax Evasion and Tax Avoidance

 

Summary:

Tax Avoidance vs Tax Evasion

• Tax avoidance and tax evasion are both methods used by individuals and businesses to minimize or completely avoid the payment of taxes.

• Tax avoidance is done by complying with the rules and regulations, yet at the same time by finding any loopholes in the laws of taxation and taking advantage of such shortcomings.

• Tax evasion is an illegal mechanism used in order to avoid the payment of taxes. Tax evasion goes against any taxation laws set in the country and is done in an unfair manner.

• Examples of tax avoidance include tax deductions, artificial transactions created with the aim of gaining a tax advantage, changing business structures to reduce tax rates, establishing companies in countries that offer reduced tax rates also known as tax havens, etc.

• Examples of tax evasion are untrue financial reporting, window dressing of financial accounts, hiding assets and income, claiming false deduction, avoiding payment of taxes due, etc.

• The main difference between tax evasion and tax avoidance lies in that tax evasion is illegal, whereas tax avoidance is a legal method used to reduce tax payments that at times can be unethical in nature.