This blog is written by Mr. Haseeb Zaman, Associate Audit and Assurance Services. Please read this blog and provide your valued comments.
What Is the Difference Between Tax Avoidance and Tax Evasion?
The terms “tax avoidance” and “tax evasion” are often used interchangeably, but they are very different concepts. Basically, tax avoidance is legal, while tax evasion is not.
Tax avoidance is the legitimate minimizing of taxes, using methods included in the tax code. Businesses avoid taxes by taking all legitimate deductions and by sheltering income from taxes by setting up employee retirement plans and other means, all legal and state tax codes.
You may have heard of “tax shields” These shields are for protection against higher taxes, and they are the strategies that make up tax avoidance.
A tax loophole is a
“Technicality that allows a person or business to avoid the scope of a law or restriction without directly violating the law.”
Since the tax code is so complex, savvy tax experts have found ways to lower taxes for their clients without breaking the law, taking advantage of parts of the law. Note the word “avoid” in the definition; finding a way to avoid paying taxes by finding a hole in the tax code is tax avoidance, not evasion.
Tax evasion, on the other hand, is the illegal practice of not paying taxes, by not reporting income, reporting expenses not legally allowed, or by not paying taxes owed. In this situation, the phrase “ignorance of the law is no excuse” comes to mind.
Tax evasion is most commonly thought of in relation to income taxes, but tax evasion can be practiced by businesses on state sales taxes and on employment taxes. One common tax evasion strategy is failing to pay turn over taxes you have collected from others to the proper federal or state agency.
These taxes are called trust fund taxes, because they are given in trust to a business, with the expectation that they will be turned over to the appropriate state or federal agency. Failing to pay employment taxes to the IRS and sales taxes to a state taxing authority and other federal, state, and local taxes can mean high fines and penalties.