Paying taxes is not one of the things we look forward to. It is not so easy to work very hard and then give a part of your income to the government. But it is the law and it requires that you pay as citizens.
There are a number of benefits to paying taxes but people still try to cheat the government by not paying. Tax evasion and tax avoidance are two concepts that are similar and sometimes used interchangeably. In this article, we explain the differences between them.
Key takeaways
- Tax avoidance is a legal way of reducing tax liability while tax evasion is an illegal means of not paying taxes.
- Different tax laws apply in different countries.
- Tax avoidance is done through tax planning and before tax liability is incurred.
- Tax evasion may result in fines or imprisonment.
Difference between tax evasion and tax avoidance
| S/N | Tax Evasion | Tax Avoidance |
| 1. | It is an illegal means of avoiding paying taxes. | It is a legal means of reducing tax payments. |
| 2. | It is criminal and defaulters may be punished. | It is not a crime and not against the laws regulating taxes. |
| 3. | It is fraud. | It is a means to reduce tax liability. |
| 4. | It is done through illegitimate means. | It is done through legal loopholes. |
| 5. | It is done after tax liability. | It is done before tax liability. |
What is tax evasion?
Tax evasion is the intentional and illegal attempt to avoid the payment of tax imposition by individuals, businesses, or organizations. It is a deliberate attempt to not pay taxes at all or to pay less than required by trying to beat the system.
Examples of tax evasion
- False declaration of income, assets, or profits.
- Falsifying records.
- Underpayment of taxes.
- Deliberately keeping business off the books.
- Exergerrating expenditure, etc.
Consequences of tax evasion
- Reduces revenue for the government.
- Affects the synergy between the government and the public.
- Influences more people to evade their taxes.
- Leads to economic instability and less growth.
- It could lead to fines and imprisonment.
What is tax avoidance?
Tax avoidance is the use of legal methods to reduce the amount of tax paid by a person, business, or organization. Here, people find ways to reduce tax liability and optimize their income through legal means. Tax avoidance involves taking advantage of the loopholes in the system. Since these loopholes are within the law, tax avoidance is not considered a crime.
Examples of tax avoidance
- Increasing expenses in getting income.
- Increasing the number of children.
- Giving your assets to your children to avoid inheritance tax.
- Investing in a retirement plan.
- Donating to charity to claim deductions, etc.
Tax systems and laws vary from country to country and there are different laws and rules that regulate taxation in different countries.
Is tax avoidance legal?
Although tax avoidance reduces the amount of deductible tax, it is still the law and therefore legal. Through proper tax planning, an individual can find ways to reduce the payable tax from their income.
Bottom Line
Paying taxes as a way of creating revenue for the government is expected of everyone who is eligible to pay. It is your duty as a citizen. With your financial advisor, plan for your finances and pay your taxes accordingly. Remember that tax evasion is a crime. If you are engaging in tax avoidance, be careful not to blur the line into tax evasion.
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what will be measures taken against tax avoidance and tax evasion
Tax avoidance is legal. As for tax evasion, ensure you have the right information, be clear on tax evasion rules, watch out for red flags and know what you need to do to comply. Also, do your due diligence with third parties to avoid doing business with anyone who may be involved in tax evasion.