What are the Differences between Tax Fraud, Tax Evasion, and Tax Avoidance?

Filing taxes is something of a necessary evil.  The revenue from taxes allows us to live in a prosperous and orderly society, but it also can feel as if you’re giving your money away.  Onerous chore that it may be, the penalties can be steep if you decide to shirk your duties as a citizen and forgo filing your taxes.

The world of tax-related crimes can be a complicated one. Failure to file taxes honestly and in a timely manner is described in many ways: tax evasion, tax fraud, tax avoidance.  To the layman, these terms may seem interchangeable, but they actually have very specific legal definitions.

Legal allowances are made for tax avoidance, and with the help of a tax specialist, both organizations and individuals can navigate this tricky terrain legally.  Tax fraud and tax evasion, on the other hand, are both illegal and can land you in serious legal trouble if not rectified immediately with the help of a tax law specialist.

Tax Avoidance

Tax avoidance is the legal practice of reducing taxes by utilizing the technicalities of the tax code to reduce the amount of money owed in taxes. This can be achieved through various means, but most commonly through tax deductions and credits.  Other methods include claiming exemptions in order to minimize tax liability. Ignorance of how to utilize these legal tax loopholes can mean overpaying and not receiving benefits such as refunds and exemptions. Unfortunately, in order to effectively capitalize on these grey areas in the tax laws, one must keep meticulous records or consult a CPA or tax attorney.

Tax Fraud

Tax fraud is broadly defined as a gross violation of tax laws, but more simply it can mean misrepresenting yourself when filing your taxes.  Examples include overstating expenses, understating income, failure to report taxable earnings, or failure to prepare and file a tax return at all.  The legal landscape of tax laws is complex and ever-changing, and unfortunately, the IRS doesn’t often differentiate between those who are deliberately defrauding the government and those who unknowingly provide incorrect information due to ignorance or confusion.

A tax fraud conviction can lead to severe legal consequences, usually to the tune of steep fines and a prison sentence of up to 3 years.  This is on top of the court costs and legal fees already paid. Even unwitting participants could face these punishments without the aid of seasoned tax attorneys.

Tax Evasion

Tax evasion, on the other hand, is an even more serious offense in the eyes of the law.  Tax evasion is deliberately altering or falsifying information when filing taxes. Underreporting income to avoid paying a higher income tax, claiming deductions one can’t legally claim, and overstating expenses are all examples of tax evasion.

Tax evasion can be achieved by forging receipts, keeping incomplete or incorrect financial records, failing to report income or by deliberately falsifying deductions and expenses. Because of the purposeful nature of this crime, the repercussions are more severe, with fines as high as $500,000 and a potential prison time of up to ten years. And if acting with or on behalf of others, charges of conspiracy can be added as well.  The best defense against charges of tax evasion is to consult a knowledgeable tax law expert.

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