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Jean   Murray

Tax Avoidance vs. Tax Evasion - What's the Difference?

By March 29, 2012

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Years ago I was taught the difference between "tax avoidance" and "tax evasion."

And every year at tax time I like to remind myself and others about the difference between these two terms. You want to avoid paying too much in taxes, but you also want to stay within the law.

  • Tax avoidance is the practice of avoiding paying too much tax; tax avoidance is legal. Finding tax "loopholes," where you can use existing laws to your advantage, is an example of tax avoidance.
  • Tax evasion, on the other hand, is not paying your taxes by illegal means. Tax evasion is what sent Al Capone to prison back in the 1930s.

The IRS has an interesting quiz which clarifies your role as a taxpayer by presenting you with questions to answer based on whether you think the described activities are tax avoidance or tax evasion.

As a business owner, you can avoid paying too much tax in several ways:

  • Understand the tax laws. This is difficult. It means reading the Internal Revenue Code, which is pretty dense and hard to decipher. If you want to go to the source, you can access the IRS tax code. An example from the Federal Register, August 2007, discusses "reportable transactions."
  • You can ask the IRS directly. Topic 101 provides information on tax assistance, IRS toll-free tax lines, walk-in assistance, and outreach programs.
  • Or, you can ask your tax preparer or adviser to keep track of tax law changes for you. Finding and using a good, ethical tax advisor can save you lots of money by allowing you to avoid taxes.
  • Of course, you can use web sites like this one and other About.com sites to keep up with changes.

Image: Getty Images

March 29, 2012 at 5:10 pm
(1) Jeff Unger says:

Jean, this is a really great article. When I was getting my master’s in tax, one of the professors described tax avoidance as tax “compliance”. I like to think of the goal of appropriately avoiding paying more tax than required by the Code as “complying” with the statutes.

April 2, 2012 at 8:50 am
(2) Jean Murray says:

Thanks, Jeff. Good thoughts about compliance.

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