There’s nothing wrong with wanting to pay less in taxes. Where you can run into trouble is how you go about decreasing your tax bill. There are legitimate tax avoidance steps you can take to maximize your after-tax income. But, failing to pay or deliberately underpaying your taxes is tax evasion and it’s illegal.
Understanding the difference between tax evasion versus tax avoidance doesn’t have to be complicated. The information and examples that follow will explain what activities cross the line and leave you exposed to an audit, or worse.
What Is Tax Avoidance?
You don’t have to resort to cheating to lower your taxes. There are plenty of methods approved by the IRS or state tax code that can help. The use of these legitimate ways for reducing tax liability is known as tax avoidance.
Many people pay more state and federal income tax than necessary simply because they misunderstand tax laws and don’t keep good records. The most common means of tax avoidance is accomplished by claiming all your permissible deductions and credits. For example, contributing to a pre-tax retirement fund lower’s your current taxable income.
Examples of Tax Avoidance
Federal and state tax regulations provide for deductions, credits, and adjustments to your income that will lower your tax burden. Here are some frequently used tax avoidance strategies.
What Is Tax Evasion?
Tax evasion is the use of illegal means to avoid paying your taxes. Tax evasion occurs when the taxpayer either evades assessment or evades payment. For example, if someone transfers assets to prevent the IRS from determining their actual tax liability, there is an attempted to evade assessment. However, if the assets are hidden after a tax liability has become due and owing, this is an attempt to evade payment.
An honest mistake on your tax return doesn’t qualify as tax evasion. A conviction requires the prosecution prove you willfully acted to evade assessment or payment of your taxes. This crime comes with serious penalties, including:
Examples of Tax Evasion
If you’re frustrated by the amount of taxes you pay, seek help from a tax professional to explore legal methods for reducing your burden. Remember, tax evasion is a crime with serious penalties. Do not take part in any of these activities:
Have Tax Concerns? Get in Touch With a Local Tax Attorney
The line between tax avoidance and tax evasion can be slight. It’s always best to discuss any questions or concerns with a tax professional before filing your taxes. If a state or federal agency has already contacted you about an issue with your taxes, it’s important to have an skilled advocate on your side. If you have tax concerns, don't delay; get in touch with an experienced tax law attorney as soon as possible.