Tax Avoidance and Tax Evasion — What Is the Difference?

sales tax filing

The top priority of every company’s tax department is to reduce their tax liability. However, that priority can be tempered with the help of tax compliance obligations. With higher and complex business partnerships and transactions—when accompanied by complex tax planning—will leave every tax practitioners to think about how the IRS or Internal Revenue Service may react to their sales tax filing position.

Whereas many taxpayers will start their tax evasion techniques, and some fall by the shady company that promises to reduce the taxes owed. The Internal Revenue Service will catch such tax scheme promoters and finds them guilty of tax evasion too. In today’s post, we will look at the difference between tax avoidance and tax evasion and what role they play when it comes to sales tax filing.

Also Read: TFRP Penalty

Tax avoidance & tax evasion both of them are different things having different meanings and consequences. The major difference between tax avoidance & tax evasion is its legality. Like it presently stands, avoiding the tax is totally legal, but when someone crosses this line in tax-evading then it will result in huge fines and even prosecution. Also, it does not take much time for this former to become the latter.

What is Tax Avoidance?

Tax avoidance deals in legal ways to reduce your tax liability. It uses a tax regime in one single territory for your benefits and reduces the tax burden. Even though Tax avoidance is the legal method used by the taxpayers, it isn’t advisable because it can be used for a person’s own benefit just to reduce the tax amount that they are liable to pay.

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Some examples include:

  • Giving a huge amount of money that you put in the tax-deductible and tax-free accounts like IRAs, 401Ks, HSAs, or college plans
  • Not showing business costs related to your own laptop, vehicle, or mobile that you use for work
  • Associating with the tax professional expert to know your income or find the right time for tax or financial actions
  • Taking other financing options like home equity loans, which generally have the tax-deductible interest on it

What’s Tax Evasion?

Tax evasion can be known as blatant fraud and mainly done when tax liability has increased. Tax Evasion is generally an illegal means to reduce your tax liability by doing fraudulent tactics such as under-statement of your taxable income and inflating costs. In simple terms, it’s is an unlawful attempt of reducing your tax burden. Most of the time, Tax Evasion is carried out with the primary motive to show lesser profits and avoid tax burden.

Some examples include:

  • Keeping your business accounts off and dealing more in cash without any receipts
  • Under-reporting your actual income to the authorities
  • Wrong reporting of your costs as the tax-deductible business costs
  • Making use of your company property for internal use with no business reason
  • Hiding cash, shares, and various other assets in a different offshore account
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Which one to apply?

Sometimes it is really tough to know which case falls in tax evasion or tax avoidance. It has caused plenty of confusion, particularly with the bigger organization that is trying to get off with no penalties. The accountant will give you good advice and ensure that you do things above board.

Tax Avoidance Vs Tax Evasion

*Tax Avoidance Tax Evasion
Lawful Unlawful
Reducing tax Not Paying Any Tax
Done before tax liability Done after tax liability
Gain loopholes in law Use illegitimate means
Deferment of the tax liability Fine or Imprisonment

Final Words 

Most of the tax positions are not challenged by the Internal Revenue Service (IRS), and most of the audits will not result in any additional tax liability. However, when faced with any kind of challenge and possibility of substantial extra liability, the taxpayers must take care in protecting against any possibility of the criminal referral.

Whereas rare and criminal referrals might prove to be very devastating, but, when you take the right precautions & avoid any suspicious conduct to be identified by the IRS, then taxpayers will greatly reduce the risk. So, here are some important factors that you need to know when filing your sales tax.

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About the Author: Nicky Bella

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