Tax Avoidance or Tax Evasion?
By: Nehemiah Jefferson, Esq., LL.M.
I am often asked the question, what is the difference between tax avoidance and tax evasion? The answer I give is quite simple: one strategy is legal and one strategy is not.
“Tax avoidance” is a strategy which involves employing legal tax strategies to place the taxpayer in the best financial position. For example, a preparer might recommend opening an IRA as a way to reduce taxable income to the taxpayer. Perhaps it might be suggested the taxpayer would be better off itemizing as opposed to using the standard deduction.
On the other hand, “tax evasion” is not legal. Tax evasion may be defined as fraud, misrepresentation, underreporting of income, and much more. Indeed, one element of tax evasion under 26 U.S.C. section 7201 is “the existence of a tax deficiency.” Punishment for tax evasion can include not only financial penalties but also prison time. Numerous celebrities have experienced these repercussions recently. News of tax evasion and other schemes seem to make headlines almost weekly. In fact, the Internal Revenue Service publishes examples of evasion, fraud, and schemes on its website. The simple way to fall into the tax evasion trap is to fail to file tax returns when required to do so and a debt is due or failure to report all required income.
Since enforcement and collection efforts by “the largest debt collection agency” have increased recently, my advice to any taxpayer would be to employ those strategies that are legal and steer clear of those that are not.
Nehemiah Jefferson, Esq., LL.M., is Principal of Esquire Tax Firm PLLC. The firm practice areas include Civil and Criminal Tax Representation, Estate Planning, Probate, and Business Planning. He earned his Bachelor’s degree from The Florida State University, his Juris Doctor from John Marshall Law School (Atlanta), and LL.M. in Taxation from the University of Alabama. Attorney Jefferson is licensed to practice law in the State of Florida, Texas, The District of Columbia, and is a member of the United States Tax Court Bar. He may be reached at www.esqtaxfirm.com.
