Many people in California confuse tax avoidance and tax evasion, but tax avoidance is legal while tax evasion is illegal. Knowing the difference between tax avoidance and tax evasion might help you to lower your tax bill while avoiding criminal liability.
Tax avoidance vs. tax evasion
Tax avoidance involves using legal strategies contained in the tax law to reduce your liability to the IRS. It is perfectly legal. For example, you might reduce your taxable income by saving money in a tax-deferred IRA or 401(k) account.
Tax evasion involves using illegal strategies to try to evade tax liability. This might include failing to report all of the income you have earned, hiding assets in overseas accounts without reporting them, failing to file income tax returns or hiding information from the IRS.
Tax evasion penalties
Simply making a mistake on your income tax return will not be enough to support charges. Your intent will instead be important. If you engage in tax evasion willfully, you can face severe penalties under the tax laws. Some of the penalties that you might face if you are convicted of tax evasion include the following:
- Up to five years in prison
- Fine of up to $250,000 for an individual or $500,000 for a corporation
- Felony conviction on your criminal record
- Costs of prosecution
Many people can benefit from learning tax avoidance strategies to reduce their tax liabilities. Avoiding taxes is legal as long as you follow all of the rules. You should never engage in tax evasion. If you do, you could end up with a felony on your criminal record, substantial fines and a lengthy prison sentence. An experienced tax attorney may help you understand how to avoid taxes without breaking the law.