The Difference Between Tax Evasion and Avoidance


tax evasion vs. tax avoidance

The IRS expects business owners like you to file and pay your taxes each year. To help you avoid overpaying what you rightfully should owe, the IRS allows you to use loopholes to lower your tax burden. 

Despite these legal tactics, some business owners purposely avoid filing and paying their taxes. You can avoid committing tax fraud and legally lower your tax obligation by learning the difference between tax avoidance and tax evasion.

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What is Tax Avoidance?

Tax avoidance is the practice of using legal methods to lower the amount of money that you owe the IRS each year. These tactics involve:

  • claiming exemptions
  • claiming tax deductions
  • claiming tax credits like the Work Opportunity Tax Credit
  • putting money into an IRA, 401(k), SEP-IRA, or other fund to delay paying taxes until later
These tax avoidance measures are perfectly legally and even encouraged by the IRS. They allow you to recoup money that you spent on legitimate business expenses throughout the year while easing the amount of money that you must pay for your business's yearly federal taxes.

What is Business Tax Evasion?

Unlike tax avoidance, tax evasion is a felony crime that involves purposely not filing your returns and paying what you owe in taxes to the IRS. You commit tax evasion if you:

  • purposely do not file your federal tax returns
  • provide false information about your business income on your returns
  • under report or under pay what you owe
  • understate your payroll taxes
  • do not withhold payroll taxes like FICA
  • hire an outside payroll service that does not turn over the withholding to the IRS
  • pay employees in cash to avoid reporting and paying payroll taxes

These and other examples of tax evasion are met with harsh penalties that the IRS can legally impose on you and your business. 

These punishments include fines of $250,000 to $500,000, federal prison sentences spanning one to five years, and having to pay court costs for your case. You also will be ordered to file all of your late or amended tax returns as well as pay what you owe in full to the federal government.

Tax evasion can ruin your reputation as a business owner and cause you to lose your company, its assets, and your means to earn a living. When you want to avoid legal and financial ruin, you must learn how to avoid tax evasion.


Taking Advantage of Tax Avoidance and Avoiding Tax Evasion

If you are a new business owner or if you are just not familiar with federal tax laws, you may not intentionally mean to evade paying your taxes. You simply might not know how or when to file your taxes or what forms of income you are required by law to claim.

It is true that federal tax laws change every year, making it difficult for even the most adept business owner to remain informed and compliant. Rather than risk running afoul of the IRS and committing a crime that could lead to severe legal and financial punishments, you can avoid committing tax evasion by hiring a tax professional to help you file your returns each year.

A tax pro knows the federal tax laws and how they should be applied to your business. This individual will also know what forms you need to file, what exemptions and deductions you are eligible for, and what expenses you can legally claim on your return to lower your tax burden.

You also can get advice about how to divert money legally to funds like an IRA or 401(k) that you do not have to pay taxes on and can use to offset what you owe to the IRS. By allowing a tax pro to help you with filing your returns and paying your taxes, you avoid the felony crime of tax evasion and the penalties that the IRS can impose on you.

Tax evasion differs from tax avoidance in several critical ways. Learn to use tax avoidance measures and steer clear from tax evasion by learning the facts of both practices.

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