Tax avoidance and evasion are common terms, but they’re often confused. There is a key difference between these terms. One means finding ways to avoid paying taxes where someone doesn’t need to. The other is a white collar crime that carries heavy consequences in the Michigan courts.
Avoidance
Tax avoidance follows the letter of the laws set out by the Internal Revenue Code and state tax laws. Businesses can use a lot of different strategies to avoid paying taxes where they legally don’t need to. This is where a professional tax preparer can prove helpful. They know the tax code and should be able to find ways that a business can legally minimize the amount they owe for taxes. Some ways this happens include tax deductions, deferral plans and tax credits. For example, a retirement account like a 401k delays taxes on income used as a contribution until a later date.
One of the defining parts of legal tax avoidance is that everything filed for taxes is truthful and transparent. The taxpayer does not hide anything from the IRS or the state.
Evasion
Tax evasion involves using illegal methods to get out of paying taxes. Tax evasion often looks like hiding income or misrepresenting that income. Some examples include hiding assets, misrepresenting deduction amounts or hiding money in international bank accounts. Intentionally not paying taxes owed is one of many white collar crimes that the federal government takes seriously. Depending on the case, an individual may face $250,000 in fines while a corporation may face up to $500,000 in fines. This white collar crime may also lead to up to five years of imprisonment.
Tax evasion stands in stark contrast with tax avoidance. The end goal for both evasion and avoidance is the same. Businesses want to pay less in taxes. However, tax avoidance means truthfully reporting income and finding legal strategies for minimizing the amount owed in taxes, evasion breaches trust.