Tax Avoidance vs. Tax Evasion

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a blog featured image topic focus Taxes: about Tax Avoidance vs. Tax Evasion

One is an acceptable practice, while the other can land you in jail. Taxes are on this context!

There is a saying that only two things in life are certain: death and taxes. Death is absolute, but fortunately, tax are not as final. You must fulfil the obligation to pay them, but how much you need to pay offers more flexibility.

These are payments made by individuals or corporations to the government to fund its activities. These are involuntary and depend on the money of the taxpayer. Some examples of money that taxes can be levied upon are income from employment wages, sale of goods and services, or capital gains from an investment. 

While taxes serve a purpose, it is easy to see why people and businesses would want to pay less on them. Fewer of this means more money on hand to use by the taxpayer; however, he or she wants to use it.

What is Tax Avoidance?

One way to lessen the payment of it is through tax avoidance. Tax avoidance is a taxation concept that allows individuals or businesses to use the law to their advantage. Since it uses methods indicated in tax laws, it is perfectly legal. 

Generally, tax avoidance is accomplished by making as many deductions and credit claims as allowed under the law. People can also do it by making investments that have tax advantages. 

A common example of tax avoidance is the use of tax shields. A tax shield makes use of expenses to offset taxable income. For example, individuals can make a deduction for medical expenses they incurred. Charitable deductions are also a common tax shield used by both individuals and corporations. 

Tax Evasion is Another Story

Tax evasion also results in lessening or eliminating the payment of taxes. But it is different from tax avoidance because of a simple yet glaring reason. Tax evasion is illegal. 

While tax avoidance uses the law to find ways to lessen the taxes to be paid, tax evasion resorts to illegal means, this is accomplished by hiding or lying about the taxpayer’s finances. 

A common example of tax evasion is underreporting income. This means that the income received is more than what is filed with the proper authorities. If assets or hidden or an income source are not reported, fewer taxes are paid, tax evasion. 

Although tax evasion is usually associated with income, it can also be committed in different ways. For example, businesses can engage in tax evasion on employment taxes. This occurs when the taxes collected from the employees are not turned over to the proper collection agencies. 

The key idea behind tax evasion is deception. 

There is a misrepresentation of the tax facts to get a more favourable result. 

For example, tax codes often allow for charitable deductions. If an individual makes such a deduction, then it is perfectly legal and is considered an example of tax avoidance. But, if the person claims to have donated more than what was actually given to the charity, then it is tax evasion. Even if the person made use of the same laws, the results are different because of the dishonesty involved. 

More Discussion about tax here

Final Thoughts

Tax codes are often long and complicated, so the distinction between tax avoidance and tax avoidance is necessary. The consequences are steep. Tax avoidance leads to more money remaining in the taxpayer’s hands, while tax evasion can lead to fines and even jail time. 

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Annette Ferguson

Annette Ferguson

Owner of Annette & Co. - Chartered Accountants & Certifed Profit First Professionals. Helping Online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.

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