Tax evasion and tax avoidance are both practices designed to reduce the amount people pay in taxes. The difference is that one involves legal means, while the other is illegal and is a form of tax fraud. Professionals such as attorneys and accountants who assist people with illegal means of reducing tax liability can be penalized along with the taxpayer.
In tax avoidance, people take advantage of the tax law to find ways to reduce their total tax liability. This is entirely legal and many people practice is every year at tax time. Using the services of a sharp tax attorney or tax accountant can save people significant amounts of money on their taxes. With tax avoidance, taxpayers seek out tax credits, writeoffs, and other means of cutting down on their tax liability.
The tax code is constantly being updated. Tax professionals keep up with changes to the law so that they can advise their clients on the best ways to reduce the amount of money they owe. With tax avoidance, people declare all of their income as required by law and submit other financial documents as needed, and the means used to reduce their tax liability are clearly documented on their tax returns.
With tax evasion, people avoid taxes not by scrupulously following the tax code, but by hiding or moving income, making false claims on a tax return, and utilizing other illegal means to pay less on their taxes. Some tax evaders avoid paying taxes altogether; people who work as independent contractors or receive monies under the table for their work, for example, may simply not declare this income and thereby avoid paying taxes on it.
The line between tax avoidance and tax evasion can sometimes be very fine. There are some things people can do with their money that are perfectly legal under the law, but could be read as attempts to evade taxes. Moving funds suspiciously and with no clear reason or documentation can attract the attention of tax authorities. Once tax authorities suspect someone of tax evasion, they will scrutinize that taxpayer closely.
Notable members of the criminal community, including no less a figure than infamous gangster Al Capone, have gotten in trouble for tax evasion. Sometimes, it is difficult to pinpoint illegal activity and prosecute people for activities such as Mob involvement, but those individuals can be thrown in jail for failing to pay taxes. In the eyes of the Internal Revenue Service, even income acquired from illegal activities needs to be declared and taxed.
