Tax Evasion and Aviodance
Tax Evasion and Aviodance
Tax Evasion and Aviodance
Avoidance
Concept
• The objective of Tax avoidance is to reduce tax liability by applying
the script of law whereas Tax evasion is done to reduce tax liability by
exercising unfair means. Tax planning is done to reduce the liability
of tax by applying the provision and moral of law.
• The terms "tax avoidance" and "tax evasion" are often used
interchangeably, but they are very different concepts. Basically, tax
avoidance is legal, while tax evasion is not.
Definition
• Tax planning
• Tax planning is the process of analysing your financial activities in a way that allows you to seek the maximum
tax benefit possible under legal provisions provided under the Income Tax Act. This Act offers various options
(Section 80C, 80D, 80E) that include tax exemptions and deductions under multiple categories. An efficient tax
planner makes use of all the different concessions to his benefit. This is an honest approach to applying the
taxation law to lessen your tax liability.
• Tax avoidance
• Tax avoidance is the practice of adjusting your financial affairs in such a manner that you avoid paying tax to
the government. Here, one makes use of shortcomings and loopholes in the law unfairly for personal benefit.
When you indulge in tax avoidance, you don’t violate the tax law but you override the intent of the law. It is
not as severe as tax evasion but can be equally bad. For example, many companies channel their funds
through offshore branches to avoid paying tax in their home country.
• Tax avoidance is the legitimate minimizing of taxes and maximize after-tax income, using methods included in
the tax code. Businesses avoid taxes by taking all legitimate deductions and tax credits and by sheltering
income from taxes by setting up employee retirement plans and other means, all legal and under the Internal
Revenue Code or state tax codes
• Some Examples of Tax Avoidance Strategies
• Taking legitimate tax deductions to minimize business expenses and
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 tax credit for giving your employees paid family leaves.
Tax Evasion
• Tax evasion, on the other hand, is using illegal means to avoid paying taxes.
Usually, tax evasion involves hiding or misrepresenting income. This might be
underreporting income, inflating deductions without proof, hiding or not
reporting cash transactions, or hiding money in offshore accounts
• Tax evasion is part of an overall definition of tax fraud, which is illegal
intentional non-payment of taxes. Fraud can be defined as "an act of
deceiving or misrepresenting," and that's what someone evading taxes does
— deceiving the IRS about income or expenses. The IRS Criminal Investigation
unit prosecutes cases under the broad designation of "tax fraud”.
• One common tax evasion strategy is failing to pay turn over taxes you have
collected from others to the proper federal or state agency.
Examples of Tax evasion
• 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, particularly
cash income.
• 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).
• 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 without having documents to support them
• Hiding or transferring assets or income.
Basic comparison of tax planning and tax
avoidance on the basis of different factors
This will help you understand the importance and benefits of tax planning:
• Nature: On a fundamental level, both tax planning and tax avoidance are two techniques of
minimizing your tax liability. Both methods are legal but that’s where the similarities end.
• Legality: Yes, tax avoidance can be legal. However, while tax planning is the moral thing to do,
tax avoidance is unethical.
• Objective: The objective of tax planning is to decrease your tax liability by using the existing
provisions of the law. On the other hand, the aim of tax avoidance is to dodge your tax
payments by taking advantage of loopholes in the law.
• Benefits: The benefits of tax planning generally emerge in the long term. For example, the
government has introduced tax benefits on various investment avenues like mutual funds and
provident funds. This encourages people to invest money for the long term and reap the
benefits. But the benefits of tax avoidance are generally in the short term. If the government
addresses the loopholes and amends the tax law, you may no longer benefit from them legally.
• Tax planning is a better alternative to tax avoidance. It is a good idea
to identify the various provisions available and make the most of
them. To do that, however, you need to begin your tax planning early
on in the year. You may not want to wait for approaching deadlines
where you might make some hasty, incorrect decisions. The best part
about tax planning is that there are many options within the legal
framework to maximise your benefits.