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Tax Avoidance vs. Tax Evasion

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Tax Avoidance vs. Tax Evasion

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  • Jan. 25, 2008
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TAX AVOIDANCE vs. TAX EVASION

From the time taxes were first imposed on American citizens, people have been trying to find ways to escape paying them. While some taxpayers continue to find legal ways to avoid paying a portion of their taxes, others simply choose to evade taxes or not pay them at all. Avoiding taxes and evading taxes may sound like similar actions, but the two terms have very different meanings. Avoiding taxes can be accomplished though various legal means, whereas evading taxes is highly illegal and can result in severe penalties. In order to effectively reduce taxes without suffering serious consequences, it is critical that all taxpayers fully understand the differences between avoiding taxes and evading taxes.

Clearly understanding what separates tax avoidance from tax evasion is a vital step for any taxpayer who wishes to save money on taxes without breaking the law. The most important difference between these two situations is that avoiding taxes can be done legally, while evading taxes cannot. In fact, tax avoidance is defined as "the minimization of tax liability by lawful methods" (freedictionary.com). Anytime methods outside of the legal boundaries are used to avoid taxes, it is considered to be tax evasion. There is a fine line which separates these two actions and as one tax professor explained "you can legally avoid paying taxes through smart business planning", but the minute you step over the line, you are evading taxes (esbinlaw.com).

Many different methods can be used to legally avoid taxes. It is up to the taxpayers to understand these methods so that they can benefit from the tax savings without breaking the law. The two most commonly used methods to avoid taxes include income deferral and income tax deductions. Income deferral, the first method mentioned, involves postponing the receipt of income until a succeeding tax year. This legal method of avoiding taxes is based on the "wherewithal-to-pay"...