TAX AVOIDANCE
Definition
Tax avoidance refers to the use of legal methods to minimize the amount of income tax owed by an individual or a business.
This is generally accomplished by claiming as many deductions and credits as are allowable.
Key Takeaways
1) Tax avoidance is any legal method a taxpayer uses to minimize the amount of income tax owed.
2) Individual taxpayers and corporations can use forms of tax avoidance to reduce their tax bills.
3) Tax credits, deductions, income exclusions and loopholes are all forms of tax avoidance.
4) These are statutory tax breaks offered to encourage certain behavior, such as saving for retirement or buying a house.
5) Tax avoidance is different from tax evasion, which relies on illegal methods such as understatement of income.
Example
1) Investing in financial instruments that allow you to save on taxes is a form of tax avoidance.
2) You can claim various deductions like home loan interest, health insurance premium, education loan etc.
3) Donating to a charity or political party in order to claim deductions is tax avoidance.
4) Using a financial planner to invest and claim deductions is a way to avoid tax liability.
TAX EVASION
Definition
Tax evasion is an illegal activity in which a natural or legal person knowingly avoids paying the actual tax liability.
Those caught evading taxes are generally subject to criminal prosecution and heavy penalties.
Key Takeaways
1) Tax evasion can be either an illegal non-payment or arrears of actually due tax liabilities.
2) Tax evasion can be detected by the IRS regardless of whether tax forms have been filed with the agency.
3) To determine tax evasion, the agency must be able to prove that the tax evasion was intentional on the part of the taxpayer.
4) While tax evasion is illegal, tax avoidance involves finding legal ways (within the law) to reduce taxpayer obligations.
Objectives of tax evasion
One reason for taxpayers to evade taxes is the personal benefits that come with it, thus the individual problems that lead to that decision.
Furthermore, the little capability of the system to catch the tax evaders poses as another incentive.
Most often, it is more economical to evade taxes, being caught and paying a fine as a consequence, than paying the accumulated tax burden over the years.
Thus, evasion numbers should be even higher than they are, hence for many people there seem to be moral objective countering this practice.
Example
1) Falsifying records
2) Underreporting income
3) Hiding interest
4) Purposely underpaying taxes
5) Illegal assigning income
TAX AVOIDANCE vs TAX EVASION
1) Nature
Tax evasion is an illegal method of minimizing tax liability. Tax avoidance, on the other hand, is a legal way to reduce the amount of tax you owe.
2) Motive
The motive behind tax evasion is the complete elimination of taxes. The goal of tax evasion is to lie to the authorities and find immoral ways to reduce tax liability. Tax avoidance is a moral and legal method of minimizing tax liability. The motive is to reduce the amount of tax you owe.
3) Consequences
Tax evasion is illegal, leading to imprisonment, fines or both if discovered. Tax liability can be avoided legally. If you have deliberately used loopholes to avoid taxes, you may be subject to legal penalties. Tax avoidance is usually not considered a criminal offence.
4) Why does it happen?
Tax evasion usually occurs as soon as the tax becomes due. On the other hand, tax avoidance can occur before the tax liability arises.
5) How it is done
When it comes to tax evasion, it is usually done through illegal means. Tax avoidance is done legally through acts such as tax planning.
CONCLUSION
Tax evasion and tax avoidance are two common ways to reduce taxes. Tax evasion is illegal, but tax evasion is a legal and ethical way to reduce your tax liability. It is always better to find legal ways to reduce your tax liability rather than taking the high road.
Informative 👍
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