The IRS takes failure to pay taxes very seriously, particularly when it comes to tax evasion. However, many people mistakenly confuse tax avoidance with tax evasion, which vary greatly in terms of legality.
It is in your best interest to know the difference between tax evasion and tax avoidance, especially when facing serious criminal charges. This guide can help you gain a better understanding of what you can and cannot do when it comes to paying taxes.
Tax avoidance is legal
Most people would like to lower their tax bills, and tax avoidance offers several legal strategies that enable you to do so. While strategies vary, the basis of tax avoidance is to handle your assets in such a way that it reduces the money you owe to the IRS.
For example, deductions let you “write off” portions of your taxable income, which in turn reduces your overall tax burden. However, you must be sure that you qualify for the deductions you claim, or you could face an audit. Tax credits are another viable option, and these reduce the amount of taxes you owe (as opposed to decreasing your taxable income).
Tax evasion is not legal
On the other hand, tax evasion is not lawful and can land you in hot water with the IRS. With tax evasion, a person intentionally misrepresents financial aspects in an attempt to pay less in taxes, or to avoid paying taxes at all.
If you own a business and attempt to write off personal expenses, you can face a charge of tax evasion. Similarly, not reporting cash income to the IRS is another common form of tax evasion. Keep in mind that this crime amounts to a felony, which means a conviction may result in substantial fines and even jail time in some cases.