Key distinction: tax avoidance vs. tax evasion, part 1

Sometimes two words seem to have similar meanings, but actually stand for very different things. Consider, for example, the words “avoidance” and “evasion.”

Both of these words generally refer to getting around or keeping away from something. In the context of tax compliance, however, tax avoidance and tax evasion have very different meanings.

In part one of this two-part post, we will describe that difference. In part two, we will discuss the role a tax lawyer can play in guiding you toward good decisions based on the distinction between evasion and avoidance.

Tax avoidance is completely legal and entirely justified. It makes perfect sense for taxpayers to make sound decisions that seek to minimize their tax liability, such as by taking advantage of appropriate tax deductions.

Tax evasion, by contrast, is not merely improper; it can lead to a criminal charge. But what is the difference between tax avoidance and tax evasion?

On its website, the IRS includes an exercise on tax avoidance and evasion that taxpayers can use to better understand the distinction. The exercise gives examples of activities that are associated with either avoidance or evasion.

For instance, keeping track of business expenses is a tactic generally used to facilitate tax avoidance through proper use of deductions. So is the practice of taking deductions for your dependents.

Not reporting as income interest earned from an investment, however, could constitute tax evasion. The same is true of income from a cash-only transaction for a personal service.

Sometimes, however, there are gray areas. This is particularly true with more complicated transactions, such as those involving offshore accounts or complex corporate accounting or revenue recognition issues.

In part two of this post, we will explain the role of a tax attorney in protecting your interests when questions of tax evasion arise.