The majority of people will misunderstand these two concepts: Tax Evasion and Tax Avoidance. They will define these two as the same thing, or, at the very least, something similar.
Tax Evasion and Tax Avoidance are radically different methods of endeavoring to pay fewer taxes. Tax evasion, from the name itself, that one can realize something’s fishy. It means that you evade the tax rules trying to not pay any taxes at all. On the contrary, tax avoidance is a change of strategies to cut down on some taxes. The obvious difference between tax evasion and tax avoidance is their legality.
Tax Evasion – tax fraud
Tax evasion is the practice of illegal methods to conceal your income or information from your tax authorities. Tax evasion usually involves hiding or misrepresenting one’s income.
Underreporting income, inflating deductions without any legit proofs, hiding or not reporting transactions made in cash, or even hiding assets in offshore accounts,… are all techniques or illicit practices of tax evasion.
A quick example for you to grasp everything you need to know about tax evasion:
Let’s say, a business owner in Ohio attempts to evade his income taxes by skimming gross receipts under someone else’s name and paying personal expenses from his business accounts then claiming them as “business expenses”. These practices may cause him several months in prison and follow by a long period of supervision. And by “long”, it means years of being supervised by the authorities.
Tax Avoidance – wise strategies
Tax avoidance is an extremely wise strategy of lowering your tax bill by re-structuring your transactions so that you can have the largest tax benefits. Business owners can avoid taxes by utilizing all legitimate deductions and tax credits. They can also use retirement plans for employees as a way to shelter income from taxes. These practices are totally legal.
Here are some methods that most taxpayers use to avoid paying too much tax to the government:
- Utilizing tax deductions to decrease business expenses and tax bill
- Exploiting tax credits for legal uses like business purchases or sick leave and family leave for company’s employees
- Planning employee retirement to shelter income from taxes
Believe it or not, tax avoidance requires advanced skills in planning. To obtain the lowest marginal tax rate, a tax planner has to have the ability to minimize taxable income, maximize tax deductions and tax credits, and last but not least, control the income and deductions timing.
Predicting and foreseeing the income and expenses are fundamentally important. An expert in tax planning requires solid estimations of both personal and business income for the long-term period. It is advisable to forecast several years ahead of expenses and income. The plan you conduct this year might be impractical next year if the income rises.
How to know if tax avoidance goes too far
Though both individuals and business owners have tons of methods to cut down taxes. However, only true tax planners can do so without violating the law.
So, how can you notice when your tax avoidance plans start to turn into foul directions? Here are some violation activities to look out for:
- Premeditatedly underreporting or omitting income
- Having two sets of books and organizing false entries in books and records
- Overstated or false-claiming deductions on a return
- Paying personal expenses by business accounts then claiming those as business expenses
- Covering or transferring assets and income
- Making a sham transaction – transactions that have no economic effect and are made to earn solely tax benefits
Choosing the right tax reduction manner
As a business owner or an individual that has taxes to pay, you should be fully aware of the tax practices you’re applying. Here are two tips to take into account:
- Gain knowledge of tax laws and legit reduction methods. Be mindful of the fact that you should differentiate those methods based on its purpose, legality as well as its features. These practices should keep you from troubles and penalties.
- Discuss matters to either a tax expert or any service firm. Who can be more suited than a tax professional to talk about tax reduction? On top of that, tax regulations are changing non-stop. It is advisable to let the expert decide which tax-saving instruments are correct upon your specific circumstances.
Without wasting words, by the end of this, you should know the basics of both Tax Evasion as well as Tax Avoidance. Though these are all used for tax reduction, Tax Evasion can lead to penalties or imprisonment as it is illegal. In contrast, Tax Avoidance is a completely legal practice that most taxpayers try to utilize. Be a wise planner, and pay fewer taxes!