Tax Avoidance vs. Tax Evasion: What’s the Difference and Why Does It Matter?

Tax avoidance and tax evasion sound like they’re basically synonyms, but in reality, tax avoidance and tax evasion are very different. In fact, one is a completely legal set of strategies that can help you reduce your tax burden, while the other is illegal and fraudulent.

What are the differences between tax avoidance and tax evasion, and what should you do if you’re under investigation for crimes related to taxes?

Tax Laws Are Confusing

First, it’s important to openly acknowledge that tax laws are complex and confusing. Even as an average, everyday consumer, you might be confused about certain aspects of tax law and overwhelmed when it comes time to file your annual tax return at the end of the year. In a business environment, where there are even more laws and regulations to take into account, tax planning can be nightmarishly complex.

Because of this, it’s ridiculously easy to misinterpret laws, make mistakes, leave out critical information, or otherwise commit tax-related actions inappropriately. That’s one reason it’s so important to talk to a tax lawyer if you’re ever under investigation for tax-related crimes or if you have tax-related questions. Your lawyer can help you understand tax laws, they can help you understand why you’re under investigation, and they can guide you in the best courses of action to take in even the most oppressive circumstances.

You don’t have to face the IRS alone, nor should you.

Tax Evasion

What exactly is tax evasion?

As the name implies, tax evasion is the act of intentionally underpaying or refusing to pay taxes that you owe, either as an individual or as a business. This could manifest in a variety of different ways, but all of them are knowledgeable and, typically, deceitful in nature. 

For example, you might claim false deductions, intentionally underreport income, fail to report income, or otherwise misrepresent your business in a way that allows you to avoid paying certain taxes.

There are a few important takeaways here:

• It is intentional and fraudulent. Tax evasion is considered a form of fraud and is a result of intentional action. Making a simple, understandable mistake on a tax return is not likely to trigger an investigation into tax evasion.
• It is illegal. Tax evasion is against the law, and there are serious consequences for committing it.
• It is a criminal offense. It’s also important to recognize that tax evasion is considered a criminal offense, and like most criminal offenses, it can lead to jail time and significantly disrupt your life.

Note that tax evasion is also considered a type of tax fraud, but tax fraud itself is a broader term that includes other types of fraud.

Most people are not motivated to commit tax evasion, nor should they be. This is a criminal offense with truly steep penalties that can be entirely avoided.

Tax Avoidance

Tax avoidance, in contrast, is a deliberate strategy of minimizing the amount of taxes you owe, but only operating within legal boundaries to do it. For example, you might search for every reasonable deduction you can make to reduce your tax burden or take advantage of exemptions and incentives as much as possible to reduce your total amount of taxes owed.

These are the top things to keep in mind about tax avoidance:

• It is intentional, but honest. Tax avoidance, like tax evasion, is an intentional strategy, but the biggest difference is that tax avoidance is fully honest. It does not include misrepresenting or underreporting any information, nor does it include lying to the IRS. It simply involves acting strategically and thoughtfully to make your tax burden smaller.
• It is legal. Critically, we should all understand that tax avoidance is completely legal. Despite the questionable-sounding label, tax avoidance doesn’t imply any nefarious activity; instead, it’s focused on maximizing potential outcomes within the boundaries set by the law.
• It is sometimes controversial. While tax avoidance itself is perfectly legal when practiced diligently, it’s sometimes controversial as an issue of ethics and responsibility. Some people argue that any act of tax avoidance robs the government of important assets that would be used for shared benefit, or that taking advantage of tax laws and loopholes is manipulative or dishonest. Accordingly, massive acts of tax avoidance can sometimes be controversial. But importantly, even the biggest tax avoidance strategies are still legal.

Tax avoidance and tax evasion do have some foundational similarities; namely, they are both intentional strategies designed to help an individual or business pay fewer taxes. 

However, tax avoidance is legal and arguably ethical, while tax evasion is illegal and associated with heavy criminal penalties. Feel free to practice tax avoidance as long as you fully understand the law, and always contact a tax lawyer if you’re ever under suspicion of committing tax evasion.