Tax evasion is the illegal practice of not paying taxes, by not reporting income, reporting expenses not legally allowed. In this situation, the phrase "ignorance of the law is no excuse" comes to mind.
Examples of Tax Evasion/Tax Fraud Practices
In general, it's considered tax evasion if you knowingly fail to report income or you don't file an income tax return. Some practices considered tax evasion/tax fraud:
- Under-reporting income (claiming less income than you actually received from a specific source
- Not reporting an income source
- Providing false information to the IRS about business income or expenses
- Deliberately underpaying taxes owed
- Substantially understating your taxes (by stating a tax amount on your return which is less than the amount owed on the income you reported).
- Filing false payroll tax reports or failing to file these returns.
- Deliberately under reporting or omitting income,
- Overstating the amount of deductions
- Keeping two sets of books
- Making false entries in books and records
- Claiming personal expenses as business expenses
- Claiming false deductions
- Hiding or transferring assets or income
What Is Tax Avoidance?
Tax avoidance is the use of legal methods to modify an individual's financial situation to lower the amount of income tax owed. This is generally accomplished by claiming the permissible deductions and credits. This practice differs from tax evasion which uses illegal methods, such as under reporting income, to avoid paying taxes.
Some Examples of Tax Avoidance Strategies
- Taking legitimate tax deductions to minimize business expenses and thus lower your business tax bill.
- Setting up a tax deferral plan such as an IRA, SEP-IRA, or 401(k) plan to delay taxes until a later date.
- Taking tax credits for spending money for legitimate purposes, like taking a Work Opportunity Tax Credit for hiring workers in your business.