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Goldburd McCone LLP
New York City Tax Lawyers

Is there a difference between tax avoidance and evasion?

Significant social conversation centers on the notion that business owners are obligated to pay their fair share in taxes. As a business owner, you do your diligence in complying by hiring tax professionals who have more specialized knowledge of the state and federal codes.

While you rely on them in compliance, you may also ask their advice on how to reduce your tax burden. This is where the difference between avoidance and evasion comes into the conversation.

You have the right to reduce your tax burden through legal means

Put simply, the biggest difference between avoidance and evasion is that tax avoidance is legal. In 1935, the Supreme Court recognized that businesses have the right to use legal methods to avoid paying taxes and reduce their burden. According to Accounting Today, business owners commonly use three methods to avoid paying taxes including:

  • Quickly paying off business expenses
  • Donating to charity
  • Delaying receipt of income until next year

While you as a business owner have the right to reduce your tax burden, you still have a duty to report your income and expenses as they occur. Business owners who fail to report their activity in earnest can cross the line from avoidance to evasion.

Then what is evasion?

Tax evasion happens when a business purposefully underpays taxes through illegal or dishonest means. Three of the most common forms of evasion include:

  • Underreporting income
  • Overstating household size
  • Misrepresenting circumstances

Tax evasion doesn’t come from making a mistake. Everyone makes errors, and the IRS knows this. Therefore, just as the law recognizes the difference between avoidance and evasion, it also acknowledges a distinction between a mistake and a purposefully dishonest action.

While you still have a duty to correct your mistakes, you likely won’t face the same consequences compared to if you misreported something on purpose or knew that you made a mistake and failed to correct it.

Encouraging positive business behavior

The recognized differences between avoidance and evasion encourage specific behaviors. Business owners can avoid paying taxes through credits and deductions, which are in place to encourage socially positive acts like donating to charity.

While credits and deductions are an incentive for businesses to play nicely in their communities, the IRS’ enforcement of tax evasion encourages every business to play fairly under the law. Business owners looking for tax planning strategies and advice can rely on the help of Goldburd McCone LLP.

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