I want to explain the difference between tax avoidance and tax evasion.
Because one is legal and the other is illegal.
Are you afraid of going to prison?
Yeah, me too.
So, let’s cover the annual scare of misfiling your taxes and accidentally committing tax fraud.
I’m just teasing, that’s not the only reason why I’m writing this.
People need to be aware of the difference for their own sake (if you are afraid of committing tax fraud) and for the sake of being well-informed.
Sadly, there are a lot of people that get upset about others using the IRS tax code to their advantage. Otherwise known as tax avoidance.
The IRS tax code is there for a reason, and there is nothing wrong or illegal about taxpayers following the tax code to lessen their tax liability. As long as it follows the IRS tax regulations.
So, let’s go over what each one looks like.
Tax Avoidance
Tax avoidance is an action taken by taxpayers to lessen their tax liability and maximize their after-tax income.
Why would you not want to do this?
In fact, you should be practicing tax avoidance every year either yourself or with a tax preparer.
If you don’t practice tax avoidance, then you are overpaying in taxes. This means you overpaid *duh*, not that you underpaid or committed a crime as most people think.
That would be similar to you going to the grocery store with a $300 bill, and the cashier offers you a coupon for ten percent off that you earned for being a loyal customer.
But you deny the coupon because you feel that it’s “wrong” to take it.
All you’re doing is overpaying your grocery bill, whereas you could have saved $30.
Just like the loyal grocery shopper is entitled to the coupon;
You as a taxpayer are entitled to know the tax-saving advantages of the IRS tax code.
Hiring a Professional
If you don’t feel comfortable translating the IRS tax code yourself, then I highly recommend hiring a tax professional to help answer your questions.
Now, I challenge you to know and understand what the tax preparer is telling you to a certain extent.
You need to be knowledgeable about what is going on with your taxes, even if you hire a preparer.
Do NOT hire someone and blindly let them take care of everything.
Know what is going on with your return. The more you and your tax preparer talk, the more they will be able to help you, and the more you will actually be able to help them,
Also, the more you know the sooner you can spot something wrong with your return. Because tax preparers are human and make mistakes.
And just like you should NEVER sign a contract that you haven’t read or do not understand – you should never sign your tax return that you have not looked over or do not understand.
Ask your tax preparer questions, that is what they are there for. If you do not understand something – simply ask them!
Tax Evasion
Now let’s look at the illegal side of things.
Because you need to practice tax avoidance in this area too!
Get it? Avoid tax evasion.
Okay, accountant joke. Not very funny to the rest of the world. Let’s move on.
Tax evasion is the failure to pay or an intentional underpayment of taxes. That also includes income-producing activities that people don’t report to the government, both legal and illegal activities.
So, if you are running a business with high cash traffic. And you decide that you’ll just pocket some cash instead of turning it all in on your taxes, that is tax evasion.
And if you decide that you are just not going to pay your tax bill due, then that is tax evasion.
Also, a little more obvious, if you are making income on the black market. You technically are supposed to report that to the IRS, if you don’t it is tax evasion.
And yes, as crazy as it sounds, the IRS tax instructions require all income from illegal activities to be included in your taxable income.
Do you see the difference between tax evasion and tax avoidance?
I sure hope so!
If you are ever having a hard time drawing the line between the two, feel free to reach out to me. I would love to help you clearly understand which one is legal and which one is illegal.
Follow along for more tax tips to help you be better informed than you were yesterday!
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