Tax Evasion vs. Tax Avoidance: One’s Illegal, The Other Is Smart Planning

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Mob boss Al Capone was famously convicted of tax evasion. He didn’t pay taxes he earned through illegal operations, and he went to prison for it.

But while tax evasion is illegal, tax avoidance is not. Tax avoidance involves using legal strategies to lower your tax liability.

It’s a matter of semantics, perhaps, but for taxpayers looking to stay on the right side of the law, it’s important to know the difference between the two.

“Tax evasion normally comes from a standpoint of knowing what the law was and willfully neglecting or ignoring those rules,” says Tom O’Saben, an enrolled agent and director of tax content and government relations for the National Association of Tax Professionals.

“Tax avoidance, on the other hand, is a planning tool,” he says, noting that taxpayers have the right to pay the least amount of tax that the law allows.

What is tax evasion?

Tax evasion can take a variety of forms, including deceit, subterfuge, camouflage or concealment, according to the IRS. Whatever the scenario, illegally running away from your tax obligations can get you into hot water with the IRS if you knowingly break the law.

For example, a Missouri businesswoman was sentenced to six months in prison in 2024 when her company collected payroll taxes from employees and kept more than $1 million instead of sending the money to the IRS.

But tax evasion can be more subtle too. By deducting all of your car expenses for your home-based business — even though you never leave your desk for work — you’d be deceiving the government for your financial gain.

Simply put, there’s a wide spectrum of what constitutes tax evasion. The circumstances of each individual scenario will determine how the IRS views the wrongdoing and whether charges are pressed.

Notably, if the IRS flags an individual for potential tax evasion, they’re often willing to give you the benefit of the doubt and consider it a mistake, O’Saben says.

“Taxpayers, in most cases, can argue, ‘Well, I didn’t know. I didn’t know that this wasn’t deductible or I should have included this income,” he says. Even those who didn’t pay taxes for years could come clean with the IRS and get back in good standing, he says.

By the IRS’ definition, evasion can take the form of an understatement or omission of income, fictitious or improper deductions, or concealment of assets. Penalties can come in the form of fines or even imprisonment.

Tax evasion: Examples

Examples of tax evasion include:

• Not reporting income. Not reporting income paid in cash could be considered tax evasion. Ditto for not filing tax returns for multiple years, especially if there are large sums of money involved, O’Saben says. Those with a blatant disregard for paying taxes, such as those who say “I’m not going to report my income — the government just wastes the money,” could find themselves in trouble, he says.
• Concealing income with cryptocurrency. With the proliferation of cryptocurrency, there’s a growing number of people attempting to hide their funds within a labyrinth of crypto wallets, says Jon Call, enrolled agent and co-founder of Minnesota-based CLAW Tax Group. The IRS is actively searching for people who violate the rules, he says.
• Lying to get tax breaks. Overstating charitable contributions or improperly claiming dependents could be considered tax evasion, depending on the facts of the case.

What is tax avoidance?

In contrast to tax evasion, tax avoidance is often equated with good tax planning. Tax avoidance involves shaping or planning your finances to reduce or eliminate tax liability by legitimate means, according to the IRS.

“A lot of the tax avoidance strategies that are relevant to the average person are done with their retirement advisor,” Call says. “You could say maxing out your 401(k) contribution is tax avoidance.”

That said, some taxpayers who push the limits of what is acceptable might find themselves in the wrong. Avoidance can become evasion “if you use a strategy that looks like it might work under the code, but the IRS determines that they don’t think it works,” says Mark Luscombe, principal analyst with Wolters Kluwer Tax & Accounting.

Tax avoidance: Examples

Other examples of tax avoidance include:

• IRA contributions to lower your tax bill. IRA contributions can be made right up to the April 15 filing deadline. So a taxpayer working on a return in February might choose to make a late IRA contribution to help lessen their tax liability — a legal way to reduce what they have to pay, Call says.
• Carefully considering when and how to make charitable contributions. It may make sense to bundle your charitable deductions in certain years to reduce your taxes. For those who have reached the age at which they must start taking money out of their IRAs, sending money directly to a charity can help reduce their tax liability, O’Saben says.

FAQs

• Tax evasion vs. tax avoidance: What’s the difference?
  

  Tax evasion is illegally reducing your tax bill or avoiding the payment of taxes altogether. Tax avoidance is synonymous with tax planning, and involves reducing what you owe within the boundaries of the law.

   

• Tax evasion vs. tax fraud: What’s the difference?
  

  Tax evasion is a type of tax fraud. Tax evasion involves an act to evade or defeat a payment of tax. Meanwhile, fraud encompasses a larger pool of fraudulent actions and schemes, including evasion.