Nobody wants to be audited. Although Randall Dang is an accountant from Canada, he visits the United States all of the time and is familiar with its tax code. He would like you to know the difference between tax evasion and tax avoidance as they are two very different things. One will help you save on your tax bill; the other will cause you to get audited and potentially fined and even jailed if the offense is bad enough. So what’s the difference between the two anyway?
Tax evasion is a big no-no. It’s usually when you fail to report all of your taxable income on purpose or report expenses that are not legally allowed in an effort to take a larger deduction. It could also just refer to not paying taxes at all. Examples of tax evasion include deliberately falsifying your income or underpaying taxes owed.
Tax avoidance is perfectly legal. This refers to when you minimize your taxable income by using methods approved by the IRS. For example, you can set up an IRA and put money in it to avoid paying taxes on it today. You can also take legal deductions, like business expenses or mortgage interest.
Oftentimes, these terms are used interchangeably, but they couldn’t be further apart. Sometimes the line could be murky here so you might want to hire an accountant like Randall Dang if you are unsure of the difference between the two still.