The difference between tax evasion and tax avoidance

On Behalf of | May 3, 2021 | Criminal Defense |

Anyone who earns money in the United States has to report taxes on earnings to the IRS. While taxpayers in Alabama can get many tax breaks and there are legal ways to reduce taxes, tax evasion can land a person in prison.

Tax avoidance vs. tax evasion

Tax avoidance means that the taxpayer uses legal ways to reduce tax liability, commonly through tax shelters. Legal ways to reduce taxes include claiming allowed deductions and credits or making investments that offer tax benefits to the buyer. For example, a taxpayer may claim charitable donations, or an employer could claim 401(k) retirement plans and health coverage if they don’t break tax laws.

Tax evasion involves a taxpayer purposefully using illegal methods to avoid paying their taxes. The IRS knows when an employee makes money from the W2 sent by the employer. This means if a taxpayer attempts to hide income, they have evaded taxes. Other examples of tax evasion include an employer not reporting cash income paid to employees, underpaying taxes or hiding assets.

Penalties for tax evasion

While tax evasion is a serious offense, statistics show that only 1,330 U.S. taxpayers faced indictment for tax evasion in 2015. The IRS commonly doesn’t pursue tax evasion for cases if the taxpayer can’t pay, but it may still audit or charge them interest.

Tax evasion may get charged as a felony criminal case or civil case. A civil case involves errors or negligence and may or may not result in fines. Criminal cases involve breaking tax laws willfully, which could include up to a five-year jail term and fines up to $250,000 for individuals and $500,000 for businesses. Some other penalties include a one- to three-year probation, paying restitution and paying prosecution costs.

Taxpayers can often remedy unintentional errors with an amended form. If they get accused of tax evasion, they may need a criminal law attorney to help outline a strategy for defense.