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Difference between tax evasion and tax avoidance

| Jan 15, 2021 | White Collar Crimes |

White-collar crimes in Michigan include several non-violent business activities that breach trust and intend to deceive in order to earn money. Two common white-collar crimes include avoidance and evasion, which relate to taxes but differ in key ways.

Avoidance

The IRS defines avoidance as taking illegal measures to reduce tax liability. Reducing taxable income isn’t illegal itself, but some of the means to do it can be.

For example, a tax payer may use tax credits, deductions, irrevocable trusts or certain savings accounts to reduce liability legally. If the tax payer lies about their income, takes unearned deductions or tries to illegally transfer assets, they have committed tax avoidance. Avoidance can usually be remedied with the taxpayer amending a return and paying taxes due.

Evasion

According to the IRS, tax evasion occurs when a taxpayer willfully tries to avoid paying taxes or paying less taxes by illegal means. This also includes hiding assets or income from the IRS after taxes become payable. Examples of tax evasion would be not reporting or reporting less tips or income, failing to report foreign income and not filing at all when the party had sufficient income.

For example, while paying employees in cash isn’t illegal, doing it to avoid payroll taxes constitutes evasion. The IRS can still determine what taxes the party owes even if the party doesn’t submit documents from what employers report to them.

Unintentional errors or unintentional non-reporting of income rarely count as tax evasion, but tax evasion penalties are usually stiff. A single tax payer could face up to $250,000 in fines, and a corporation could face up to a $500,000 fine.

The government takes white-collar crimes seriously, often resulting in felony charges. Tax payers have the right to an attorney to help them show that the charges are in error.