What is the difference between tax evasion and tax avoidance?

On Behalf of | Nov 8, 2021 | IRS Tax Law

Texas residents and businesses are required to pay federal income taxes. However, some of them manage to find loopholes. Two ways are through tax evasion and tax avoidance. You should know what these terms mean and how they differ.

What is tax evasion?

Under tax law, tax evasion is an illegal activity that involves deliberately not paying the taxes that are owed. It can also be committed through transferring assets to fraudulent accounts, reporting a significantly lower amount of income than what’s actually earned or not reporting income at all. Tax evasion is a federal crime that can carry serious penalties.

What is tax avoidance?

Tax avoidance is different from tax evasion. It is a legal activity regarding the way you pay your taxes that helps you to save money. When you take advantage of tax credits, it helps you save on the amount of money you have to pay toward your taxes.

For example, if you are a freelancer, you can save money toward your taxes by reporting the equipment you use to work. If you purchased a new computer specifically for your work, you would be able to reduce the cost of it from your taxes to save. Or you could donate some money to charity and later write that off on your taxes to save money.

What are the differences between tax evasion and tax avoidance?

There are two major differences between tax evasion and tax avoidance. Tax evasion involves lying about income and hiding income. Tax avoidance has nothing to do with either of those things.

Unlike evasion, avoidance involves structuring everything in a way that you pay less in taxes that is completely legal and even encouraged by the federal government.

It’s common to have some confusion about taxes. However, there is help available to teach you how to legally save money when you have to pay.