As a taxpayer, it is not wrong to want to lower the amount you pay for taxes. People have two approaches to this, and it is tax avoidance and tax evasion. What makes these two different is that the former is legal, and the latter can put you in jail.
Many people are confused about tax evasion and tax avoidance, which is why it is important to know their fundamental differences. You would not want to do anything illegal, right? It is every person’s responsibility to be educated about taxes and their obligations to pay them.
What Is Tax Evasion?
First of all, tax evasion is an illegal method to avoid your taxes. This happens when the taxpayer purposely underpays or misrepresents their tax payables. It’s essential to know how tax evasion is done to prevent penalties from it.
Examples of Tax Evasion
Here are some of the most common tax evasion schemes:
- Underpaying Their Taxes – It is a responsibility to pay taxes on time. If a person fails to do so, they will have to deal with the penalties given by the IRS.
- Not Updating Income Status – If you’ve landed another job that contributes to your income status, but you didn’t report it or update it, this can be considered tax evasion.
- Not Filing Tax Returns – Once you earn money, the IRS expects you to file a return. They can see if you haven’t been filing tax returns because it is being monitored.
Penalties for Tax Evasion
Paying fines, getting convicted of felonies, and going to prison are the common penalties of tax evasion. If you receive a penalty of paying fines, not only would you have to pay your original tax with the interest, but you also need to pay a fine of $100,000 to $250,000, depending on how heavy the penalty is.
Tax evasion is a crime. However, if you made a simple and honest mistake in your taxes or tax return, it doesn’t necessarily mean that you would be penalized.
What Is Tax Avoidance?
Tax avoidance is the legal method of reducing your tax obligations. This is an approved method of the IRS to reduce your tax liabilities. It is a common way to encourage business owners and professionals to continue their operations in a particular state or industry.
Examples of Tax Avoidance
Here are some of the ways or tax avoidance tools that can help you reduce your tax balance:
- Savings Accounts and Plans – If you have savings plans and accounts, such as retirement plans, college savings, and health savings, it can help you reduce your taxable income, therefore lowering the tax you have to pay.
- Tax deductions – If you are running a small business out of your home, most of your expenses can be declared against your income, so your tax obligation is reduced.
If you are confused about which expenses you can declare or the legal ways you can reduce your taxes, make sure to consult a tax professional. Ask them if you are qualified for tax deductibles and credits.
Tax Evasion vs. Tax Avoidance: Conclusion
The way to differentiate tax evasion from tax avoidance is to remember that the first is illegal while the latter is not. Make sure to consult a tax professional to know the ways you can deduct your taxes legally. You don’t want to have a felony in your records.
To help you with your taxes, feel free to get in touch with Axiom Tax Resolution Group. Ignoring IRS tax problems and notices can be a costly mistake. We have many tax resolution specialists who will give you permanent solutions to your tax problems with the IRS. Contact us today!