18 C
New York
Saturday, May 21, 2022
Image default
Finance

Tax Avoidance vs Tax Evasion: What’s the Difference?

It’s no secret that trying to make heads or tails of your tax returns can be an anxiety-inducing experience for anyone. It can feel easier to just bury your head in the sand and forget about them.

However, this can mean serious problems with the IRS down the line. The IRS is now employing methods such as using data from medical records, bank and credit transactions to catch tax cheats.

So the questions remain: What is tax avoidance and what is tax evasion? And how does this affect the average person filling their tax forms?

In this article, we will look at tax avoidance vs. tax evasion and tell you everything you need to know.

Figuring out exactly how much tax you need to pay within the rules can give anyone a headache. This guide is here to take the pain away.

What Is Tax Avoidance?

Tax avoidance is a legal way to lessen the amount that someone pays in tax, due to various legal loopholes. These methods are actually condoned and sanctioned by the IRS.

These legally sanctioned methods to reduce your taxable liability are known as tax avoidance.

Some people don’t recognize that they can use these legal loopholes to reduce the amount of income and federal tax they have to pay.

Because a lot of people aren’t aware of these permissible deductibles and credits, they end up paying thousands of dollars more in tax than they need to.

Some Examples of Tax Avoidance

Health Savings Accounts- If you’re in possession of a high deductible health care plan, take a look at a health savings account (HSA).

The money that’s put into a HAS is tax-deductible and can be rolled over into following years if not used.

Contribute to Your Retirement Fund- Putting money aside for your retirement is classed as a legal tax avoidance scheme.

If you have an employer with a retirement plan you should join it as they will also contribute. This money is taken out from your pre-tax earnings and not subject to tax rules.

Look at Your Work Deductions- Not everyone claims all their tax deductions when it comes to workplace purchases and benefits.

Depending on your area of work you may be able to claim for travel, gas, work uniforms, laptops, and even vehicles. Business expenses are a necessary requirement and it’s amazing how much you can claim as tax-deductible.

College Saving Plans- Some college saving plans can work like 401(k)s or IRAs. Do your research and shop around to find one that works best in terms of tax deductions on your investments.

Giving to Charity- If you give to a charity you are able to claim up to $300  in tax deductibles for a single person. For a couple, the threshold is $600.

Home Equity Deductions- In comparison to other loans, home equity loans are tax-deductible.

Although, there are caps on how much of an annual deduction you can make based on your income. It’s also worth noticing how much of it was used for home improvements.

What Is Tax Evasion?

Tax evasion is where a person will use illegal methods to prevent paying tax on their income. Tax evasion is established when a person seeks to evade taxation liability by obscuring or hiding their assets.

When a person commits tax evasion they are liable to be prosecuted and face a penalty, conviction, and serious fines.

If tax evasion is deemed serious enough by the IRS and the government, people can even be given sizable jail sentences.

In 2020, Adel Kellel, a New York restauranteur was sentenced to 2 years in prison for tax evasion. It really can happen to anyone if they don’t declare their proper earnings.

Consequences of tax evasion have the capacity to uproot and destroy livelihoods.

However, simple mistakes on tax returns and even unfiled tax returns do happen. If you want to speak to professional tax accountants who can help you with your tax returns, click here to learn more.

Some Examples of Tax Evasion

Not Filing Tax Returns- People wrongly assume that if they don’t file a tax return they are safe from the IRS. The IRS is expecting a tax return from you.

They monitor employers and interest from banks and financial institutions. If you have made money, you need to have a record of it.

Underreporting Your Income- This is one of the most common forms of tax evasion.

People end up underreporting how much they earn through cash-in-hand jobs, tips, and side-hustles. This is a form of tax evasion and if you’re caught you are eligible to pay the money you owe in tax.

Taking False Deductions- This is a form of tax evasion where people fabricate their tax returns and claim on expenses that never happened.

You can’t lie or misrepresent your expenses on your tax returns. If found guilty you can be convicted of criminal charges.

Deliberately Underpaying or Not Paying Taxes- When it comes to taxes, filing the forms is only 50% of the work. You are also obligated to pay the taxes after you have filed them.

If for any reason you are struggling to pay your taxes, it’s always best to be upfront and honest about your circumstances.

By contacting the IRS you can explain your circumstances and work out a repayment plan. By ignoring it, you will only make the fines worse in the long run.

Some Tax Filing Tips

When thinking about paying your taxes, it’s worth having a plan of action. Here are some handy hints so you don’t end up accidentally committing tax evasion:

Keep Records

A lot of people don’t keep extensive records of their purchases and paychecks which is detrimental when it comes to tax filing.

Even if you aren’t the most organized person in the world, designate a folder or cabinet to keep your documents in. When everything is in one place, it’s much easier for you to sort through your files.

Speak With an Expert

Not everyone has extensive knowledge of tax filing and the tax laws. If you are confused or overwhelmed by having to process your taxes, why not pay someone to do it for you?

They will be able to work out the best way for you to save money on your deductibles as well as it taking the pressure off you.

Leaving it to the professions means that you can focus on other aspects of your life, instead of sweating over countless forms!

Don’t Leave It Until the Last Minute

Life can be hectic. But tax forms aren’t just something you can fill in the day before. It takes planning and organization to sort through your taxes, don’t underestimate how long it takes!

Breaking tasks down into manageable chunks each day is one way to alleviate stress. This is as well as ensuring that all the information is correct and accurate.

If you’re having to rush your tax return, the chances are you’re not being as rigorously or meticulous. This means that you could end up making a mistake and unwittingly commit tax evasion without even realizing it.

Give yourself the time and breathing space to fill your tax forms in properly. It will save you from having to explain yourself in court further down the line.

Don’t Assume You’re Exempt If You Live Abroad

If you’re fortunate to live abroad, you may think that paying tax in your country of residence is enough.

However, unfortunately, as an American citizen, you are still liable to pay income tax, even if you’re paying tax somewhere else. This can be a frustrating reality for many ex-pats, however, there are schemes and deductibles that you’re able to claim.

It’s worth noting your country of residence and their arrangement with the US to determine how much tax you’ll need to pay. You are obliged to declare all worldwide income you earn in a year to the IRS.

You only don’t have to pay tax if you decide to renounce your American citizenship and become a member of a different nation.

Tax Avoidance vs. Tax Evasion: The Breakdown

We hope this article on the differences between tax avoidance vs. tax evasion has given you a comprehensive overview.

Tax is a tricky subject to get your head around at times, however, it’s best to try and inform yourself of the information out there.

If you are ever unsure of what to do regarding filing your tax forms, it’s always best to speak to a tax professional who can advise you on your options.

The worst thing you can do is to ignore your tax questions. The definition between tax avoidance and tax evasion can be so small.

This is in tandem with the rules and laws changing, depending on the existing legislation.

If you found this article helpful and want to read more, check out our other articles!

Related posts

Getting Financial Assistance During The Corona virus Pandemic

VWB Blog

Lawsuit Cash Advances: Is Pre-Settlement Funding Right for You?

VWB Blog

Why You Should Be Very Vigilant Before Claiming A Loan?

VWB Blog