Tax Avoidance vs. Evasion

Whenever tax reform or tax law is discussed, there is a lot of attention paid to whether different groups of people are paying their fair share. There is often talk of closing loopholes that allow people to avoid taxes or that allow some taxpayers to pay taxes at a lower rate.  

However, those “loopholes” are typically tax deductions or tax credits that were put into the tax code for a reason.  No taxpayer has an obligation to pay more than the minimum amount of taxes that are due under the tax law, and it is important to distinguish between tax avoidance and tax evasion when assessing whether or not a taxpayer acted appropriately.

Taxpayers also need to ensure that, while they are take advantage of legitimate deductions to avoid taxes so their bill isn't bigger than necessary, they do not cross the line into tax evasion. A New Jersey tax lawyer can provide assistance to taxpayers in using legal means to reduce taxes while ensuring full compliance with all tax laws.

Distinguishing the Two

Many different types of actions that taxpayers take are considered to be tax avoidance. For example, making certain investments in order to get tax breaks is a form of tax avoidance.  Claiming all deductions that a person or business is entitled to is also tax avoidance. Incorporating a business to get a more favorable tax rate is considered a form of tax avoidance as well, as is establishing an offshore company that is located within a tax haven.  As long as a taxpayer acts within the scope of the law and complies with all legal rules and requirements, the taxpayer is engaged in legal tax avoidance.  

Tax evasion, on the other hand, involves taking actions that are in express violation of tax laws. A taxpayer who does not report cash payments made to his business, for example, is engaged in tax evasion, as is a taxpayer who takes a job and works under the table instead of claiming all earned income. Claiming deductions or credits that a taxpayer is not entitled to, such as claiming a home office deduction when the taxpayer does not have a home office, is also tax evasion.  

Sometimes, there are grey areas in which it is not clear whether or not a particular deduction or particular transaction is tax avoidance or tax evasion. Under these circumstances, it is important to have documentation to back up the decisions that you are making and to prove that the actions taken were within the bounds of the law. For example, some owners of S-corporations can avoid paying Social Security and Medicare taxes on a portion of their income by classifying the income as a distribution instead of as wages. This is legal tax avoidance, as long as the taxpayer pays himself a reasonable salary and has legal justification for claiming some income as a distribution.

Seek Help From a Skilled Tax Attorney Today

A tax lawyer can provide assistance to individuals and businesses in avoiding taxes while ensuring that no lines are crossed into tax evasion.