Tax Evasion vs. Tax Avoidance: Definitions and Differences

tax Jan 13, 2023


The difference between tax evasion and tax avoidance essentially boils down to two elements: view them below.

ax avoidance and tax evasion are two very different things with different definitions and different consequences.

What is tax evasion?

Tax evasion is a form of tax fraud that involves the use of illegal methods to conceal income or information from the IRS or other tax authorities to avoid the assessment or payment of taxes.

Examples of tax evasion include claiming tax deductions or tax credits you’re not entitled to, intentionally underreporting or failing to report income, and concealing taxable assets.

Tax evasion can result in fines, penalties and/or prison time.

What is tax avoidance?

Tax avoidance is the use of legal methods to reduce taxable income or tax owed. Claiming allowed tax deductions and tax credits are common tactics, as is investing in tax-advantaged accounts such as IRAs and 401(k)s.

The difference between tax evasion and tax avoidance

The difference between tax evasion and tax avoidance largely boils down to two elements: lying and hiding.

“Tax avoidance is structuring your affairs so that you pay the least amount of tax due. Tax evasion is lying on your income tax form or any other form,” says Beverly Hills, California-based tax attorney Mitch Miller.

For example:

  • Putting money in a 401(k) or taking advantage of a tax-deductible donation are perfectly legal methods of lowering a tax bill (tax avoidance), as long as you follow the rules.

  • Concealing assets, income or information to dodge liability typically constitutes tax evasion.

Consequences of tax evasion

An innocent mistake on your tax return doesn’t automatically turn you into a tax evader — the intent is a factor. If you did intend to evade taxes, here’s a taste of the penalties you could face, according to the IRS

Click the link below to learn more


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