What’s the Difference Between Tax Avoidance and Tax Evasion?

September 10, 2021

While similar in name, tax evasion and tax avoidance are different in a big way. Tax evasion uses illegal means not to pay taxes. In contrast, tax avoidance uses legal means to lower the amount of taxable money on which an individual or organization owes.

Tax evasion is an illegal activity in which an individual or organization purposely conceals information or income from the government or another tax authority in order to avoid paying their true tax liability. Individuals or organizations suspected of tax evasion will need a tax fraud lawyer because tax evasion charges are often criminal, bringing about potential high financial fines and jail time.

Tax avoidance involves following existing legalities to reduce the tax owed to the government. Claiming deductions or tax credits, putting money into a 401k, or donating to charity would all be legal means of lowering taxable income, which is legal tax avoidance.

Examples of Tax Evasion

Most people abide by the perfectly legal means of lowering taxable income, so they won’t need to worry about hiring a tax fraud lawyer. However, tax evasion comes down to intentionally lying about or hiding information so that individuals or organizations pay less in taxes, which is sure to bring about a need for a tax fraud lawyer. Here are some other common forms of tax evasion:

Failure to report income from an all-cash business. This includes illegal activities such as drug dealing and prostitution. Failure to account for all cash earned through a business constitutes tax evasion. This is a very common way the IRS catches people.
Failure to pay taxes on cryptocurrency. Just because you conduct business using Bitcoin and the transactions are more anonymous doesn’t mean that the IRS doesn’t count the currency as taxable. Rules are already in place to count Bitcoin transactions as taxable by the IRS.
Not documenting cash-paid employees. It’s okay to pay the nanny in cash, but if you do, you must also report this to the IRS via a W-2 form each year.
Not counting overseas income. Anyone who works or owns rental properties in other countries is liable to pay taxes on those incomes.
Assigning income to someone else. To make taxable income lower, individuals deliberately assign income that is actually theirs to a sibling or relative.
Falsely reporting income. Many people hire CPAs to help with taxes. These CPAs will often ask clients to fill out a form or questionnaire to understand how to best file their taxes.

Falsely reporting information on these forms is a way of lying about income and falls into the category of tax fraud.

If the IRS suspects a person has committed tax evasion, their accounts and financial holdings will typically be audited to confirm if the resulted lower tax payment was an intentional fraudulent act or a legal means of tax avoidance.

Penalties for Tax Evasion

As mentioned previously, putting money into your 401k doesn’t mean you’ve committed tax evasion and need to hire a tax fraud lawyer. And, if you’ve made a mistake on a form, you’re not automatically going to jail. When it comes to differentiating between tax avoidance and tax evasion, intent is everything.

If the government thinks you’ve intentionally evaded paying taxes, not only can you be liable for the taxes you tried to avoid paying, but you could also face one or more of the following serious penalties:

Five or more years in jail
A fine of up to $250,000 ($500,000 for corporations)
A felony on your record
Attorney’s fees

While the criminal penalties are severe and prison time is a legitimate outcome of tax evasion, guilty tax evaders also have to consider that they’ll be stuck with hefty civil penalties as well. These can add up quickly and easily surpass the tax owed initially.

What to Do About Tax Evasion

If you’re suspected of tax evasion, the IRS will offer you a chance to come clean by filing an amended tax return, which allows you to make changes to previous tax returns, unlike bank frauds. If you don’t take the opportunity to right your wrongs, the United States government is unlikely to look favorably upon you. In that case, you should hire a tax fraud lawyer as soon as possible to help you avoid the mountain of penalties that could potentially be waiting for you.

Practice Areas

Recent Cases

United States v. S.I.: HHS-OIG investigated our client for Health Care Fraud and Aggravated Identity Theft based on the client's allegedly participating in a "telemedicine" kickback scheme that defrauded Medicare of approximately $30 million in reimbursements for not-medically-necessary durable medical equipment and genetic testing. After our having conducted our own investigation into the matter and making several presentations to the investigating agents and prosecutors, we convinced the Government not to prosecute our client.
United States v. J.P., et al.: The Department of Justice's Criminal Division, Fraud Section charged our client and nine other individuals in a $1.4 billon health care fraud and money laundering conspiracy concerning toxicology laboratories' using rural and critical-access hospitals in an alleged pass-through billing scheme. After a six-week trial, during which the DOJ presented forty-two witnesses—including cooperating, alleged co-conspirators—and over 500 exhibits, the jury deliberated for four days before failing to unanimously agree on a verdict, prompting the Court to declare a mistrial. DOJ released all of the client's seized assets at the conclusion of the case.
United States v. F.A.P., et al.: The FBI investigated and the Government indicted our client for Aiding and Abetting another person's traveling in interstate commerce with the intent to engage in illicit sexual conduct with a minor. After completing our investigation of the case, we convinced the Government to dismiss all charges against our client two weeks before the trial began.
United States v. K.J.: The US Secret Service investigated our client for Wire Fraud, Theft, and Embezzlement, based on the client's allegedly diverting over $100,000 from the client's employer's business bank accounts to the client's personal bank account. We convinced the Government not to prosecute our client.

View all case results