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Tax Avoidance and Tax Evasion are commonly in use by people interchangeably. People often mistake the two terms as having the same meaning, but in reality, they are two different words. To know much better about these two distinct concepts, we should identify each.
Tax Avoidance is a legal way of minimizing taxes by the IRS or Internal Revenue Service. Methods used to avoid taxes are all legitimate and approved by the IRS. These methods include employment retirement plans and setting up of beneficiaries for employees.
Examples of tax avoidance are tax deductions which are used to lessen business expenses which in turn lower business income taxes. A second example is a tax deferral plan which is a legal way to delay the paying of taxes in an agreed upon date. Lastly, another good example of tax avoidance is a tax credit. Taking tax credits are often for spending money on legal purposes such as a work opportunity tax credit.
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Tax evasion, on the other hand, is illegal and is considered a felony in the United States. Evasion can be on purpose such as declaring less income than a business earns. Tax evasion is mistakenly thought of by many as being only part of income taxes. The truth is that this fraud is commonly in practice by corporations involved in state sales. Employees can also commit fraud.
It is also considered tax evasion if a business owner knowingly fails to report income. Others also under-report or declare less income to reduce taxes. Another example of tax evasion is when the owners of the business provide false or fictitious information regarding revenues and expenses. It will also be tax evasion if one underpays taxes on purpose.
Tax evasion isn’t solely being committed on the corporate level. Some businesses have employees who commit acts related to evasion. Typical employees involved in fraud often have something to do with practices like pyramiding and employment leasing.
Employment leasing is when employees hire an outside payroll service (other than the company) that doesn’t report to IRS. Enterprises and staff alike also commit tax evasion when salary is paid directly by cash, committing failure of reporting these cash payments to the IRS. Employees can also create fake payroll reports to file in a bid to lessen taxes.
A lot of cases regarding evasion often see action in tax courts, but other cases such as those of Herbert C. Watts and Edward R. Vrdolyak from Chicago are directed to the criminal division of the IRS for prosecution. Criminal tax defense against these cases are usually expensive and cost a lot of time.
Takeaway
A lot of people agree that paying taxes is a pain to humanity. However, failure in paying taxes can cause even more devastating events. People should also know the difference between Tax Evasion and Tax Avoidance. Tax Evasion is illegal, and Tax Avoidance is legal. Tax payments should be settled properly to avoid having to pay huge penalties and possibly spending jail time.
