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Shrewd or fraudulent? The line between tax avoidance and evasion

On Behalf of | May 31, 2022 | Federal Offenses, White Collar Crimes |

It is natural to try to minimize your tax liability. Structuring your finances to reduce your taxes is a perfectly legitimate way to manage your affairs. However, there are limits to how you can go about decreasing your taxes. Though tax avoidance and evasion sound similar, they are two terms that are viewed entirely differently by the IRS.

Tax avoidance is legal

Tax avoidance, though an intimidating term, simply refers to any legal actions that an individual may take to reduce their tax liability. This includes:

  • Investing in tax-deferred accounts, such as a 401(k)
  • Applying a tax credit
  • Deducting business expenses
  • Structuring a transaction to minimize tax owed

Tax evasion is not

Tax evasion refers to the crime of illegally underpaying your taxes. This is a felony that both individuals and corporations can commit. Common examples of tax evasion include:

  • Under-reporting taxable income
  • Overclaiming deductions
  • Deliberately underpaying taxes

Tax evasion is a serious crime that can result in a maximum of five years imprisonment and $100,000 in fines for individuals.

Splitting the difference and the importance of intent

Tax codes are complicated. If you have a lot of assets, your finances are probably complicated as well. In both tax avoidance and tax evasion cases, individuals are trying to lower the amount of taxes that they pay. Due to the complexity of the tax code, the line between these two terms can sometimes get blurry.

Fortunately, the IRS understands that the tax code is extremely complicated. Because of this, one of the most important defining characteristics of tax evasion is that you must have made an affirmative act with the specific intent to evade a known legal duty to pay.

Your recourse if facing tax evasion charges

Anytime you find yourself facing criminal charges, it’s important to seek the help of an experienced defense attorney. In the case of tax evasion charges, a criminal defense attorney experienced in handling federal crimes can be extremely helpful. They can help to poke holes in the prosecution’s case and prove that no specific intent of wrongdoing existed.