Tax Avoidance v. Tax Evasion – One of These is Not Like the Other

Publications Jan 31, 2024 Denver, CO

“Tax avoidance” and “tax evasion.” One of them is legal and encouraged; the other can land you in prison. The differences between them are often common sense, but there are gray areas that may invite trouble for the careless or unwary.

Tax Avoidance means using laws and regulations to reduce and avoid tax liability. Tax avoidance is smart financial planning that can (and should) be implemented personally and professionally.

Personal tax avoidance strategies include moving from a state that taxes personal income (i.e., California) to one that does not (i.e., Florida); donating to charities; making certain financial gifts to family; and maximizing contributions to 401k plans or retirement accounts.

Professional tax avoidance strategies include claiming business expenses; depreciating assets; structuring a business to achieve a better tax bracket; and categorizing assets in a way that inures favorably come tax time.

Tax Evasion means using deception or fraud to not pay taxes. Examples of tax evasion can include failing to declare income; moving/hiding funds; making false statements on tax documents; and claiming deductions/credits to which you know you are not entitled, among others.

Still confused? Let’s look at these scenarios:

Sensible Susie’s accountant advises that, if she invests in a new computer system for her business, she can claim business expenses and depreciation that will reduce her company’s effective tax liability. Sensible Susie follows this advice and invests in a new computer network, saving hundreds in tax liability. Sensible Susie has successfully used lawful tax avoidance strategies for her company’s benefit.

Reckless Randy also wants to reduce his company’s tax liability, but the company has no funds to invest in assets and few expenses to claim. Reckless Randy decides to “fudge the numbers a bit” by falsifying entries in the company’s books to make it seem as if he suffered significant business losses that he can write off. He also buys a Bentley Bentayga for his wife’s personal use and claims it as a business expense. Reckless Randy is guilty of tax evasion under 26 U.S.C. § 7201.

Bottom line – filing tax information that includes misrepresentation, fraud, or deceit is a great way to ensure you’re committing tax evasion. Having a tax professional assist and guide you through any grey areas is a smart financial move that can shield you from possible missteps and an unpleasant visit from Uncle Sam.

About Greenspoon Marder

Greenspoon Marder LLP is a full-service law firm with over 240 attorneys and more than 20 office locations across the United States. With operations from Miami to New York and from Denver to Los Angeles, our firm attracts some of the nation’s top talent in key markets and innovation hubs. Our core practice areas include Real Estate, Litigation, and Transactional Services, complemented by the capabilities of a full-service firm. Greenspoon Marder has upheld a spot on The American Lawyer’s Am Law 200 as one of the top law firms in the U.S. since 2015, and our goal is to provide exceptional client service by developing a thorough understanding of each client’s business needs and objectives in order to provide strategic, cost-effective solutions.

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Tax Avoidance v. Tax Evasion – One of These is Not Like the Other

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