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What's the Difference Between Tax Planning and Tax Evasion?

When done right, tax planning is a legal and ethical practice. It involves individuals or businesses taking advantage of tax laws and regulations to defer, lower, or eliminate their overall tax liability. Legitimate tax planners work with their clients to proactively manage their finances while still adhering to applicable laws and regulations.


Reducing your taxes doesn't have to be shady - there are several legal methods to cut down on what you owe. For instance, you could take advantage of donor-advised funds, tax-loss harvesting, qualified opportunity zones, and other strategies.


On the other hand, tax evasion is an illegal and unethical practice that involves concealing or misrepresenting income or assets to avoid tax obligations. This form of evasion may involve hiding assets domestically or offshore, inflating deductions, taking false credits, falsifying financial statements, underreporting taxable income, or not filing taxes at all. The consequences of such practices can include substantial fines, criminal prosecution, and even imprisonment depending on severity.


Types of Tax Evasion

Tax evasion is an illegal act that involves using deceptive tactics to avoid paying taxes. Americans who commit tax evasion may try to hide their income, misrepresent their expenses, or fail to report taxable transactions. Tax evaders can be subject to criminal liabilities and hefty fines if convicted of this offense.


The most common types of tax evasion include:


  • Failing to file a return: Filing a false or incomplete return to avoid full taxation is considered tax fraud.

  • Underreporting income: This involves intentionally reporting less income than was earned to pay fewer taxes.

  • Claiming ineligible deductions or credits: Claiming ineligible deductions or credits on your return can also be considered fraudulent activity.

  • Hiding assets or income in offshore accounts: While holding offshore accounts for asset protection purposes isn't in itself illegal, tax evasion can occur when assets are intentionally hidden from the government.

  • Misrepresenting business expenses: Business owners cannot legally write off personal items as business expenses to reduce their taxable income.


Penalties for Tax Evasion

Ultimately, any kind of intentional manipulation of financial records to evade taxation is illegal and should be avoided at all costs. Americans who attempt such activities can face severe penalties, including jail time and hefty fines.


Section 7201 of the Internal Revenue Code reads, “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”


However, the specific penalty someone incurs depends on the case. You could pay a lower fine, the full maximum, or no fine at all.


How Can I Make Sure I'm Not Committing Tax Evasion?

Tax planning and tax evasion are two distinct practices. Practicing prudent tax planning strategies can help reduce your overall tax burden while attempting to avoid tax obligations through illegal activities can result in serious penalties, fines, or even imprisonment. Therefore, it is essential to seek the advice of qualified financial professionals when making any decisions related to taxes.


Tax professionals can provide valuable insight into effective strategies for efficient tax planning. By doing so, individuals and businesses can ensure they are not violating tax regulations while still leveraging available options for reducing tax liabilities. This will help optimize their finances in a legally-compliant manner.


The ultimate goal should be to ensure compliance with all applicable laws as well as the protection of personal interests.


Being an Ethical Taxpayer is a Must

Individuals and businesses alike need to practice responsible tax planning strategies that are fully compliant with the law. Consulting with a qualified tax professional can help provide valuable insights into effective ways of managing taxes, while also leveraging available options for reducing tax liabilities.


Here at Ohio Tax Advocates, we are here to help you reduce your tax burden legally and ethically. If you would look us to take a look at your most recent tax return, give us a call at 614-356-8647.



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