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The difference between tax fraud, tax evasion and tax avoidance

Do you know the difference between tax avoidance, tax fraud and tax evasion? The terms are often used almost interchangeably on the news when someone is in trouble with the law -- but the terms don't actually mean the same thing at all.

Tax avoidance is actually the practice of using legal means, approved by the Internal Revenue Service, to minimize one's personal or business tax liabilities. For example, taking a tax credit or an allowable deduction for a home office is a form of tax avoidance. While it's a perfectly acceptable practice, it can sometimes create problems if an individual or business pushes the boundaries of the law.

Tax fraud, on the other hand, is an actual crime. Fraud occurs when someone intentionally tries to skirt tax laws or hide their true tax liability. Examples of tax fraud include purposefully failing to file tax returns, knowingly claiming invalid deductions, using a second set of books for a business, claiming non-existent dependents and so on. Tax evasion is a specific subcategory of tax fraud. It's the crime of purposefully avoiding or underpaying your taxes by hiding income or deducting expenses that aren't legitimate.

It's important to understand that's there's a huge difference between tax fraud and simple negligence. Many people -- including business owners -- make honest mistakes on their taxes simply because they are uninformed or misunderstand the complex set of tax regulations they are required to follow. It's the intentional aspect of tax fraud and evasion that usually makes the act criminal in nature.

Tax crimes are often aggressively pursued by the federal government and highly publicized, largely because the tax system in the United States relies on a sort of honor system and self-reporting. The government makes the penalties for violating tax laws so severe that it discourages others from trying.

If you're being investigated by the Internal Revenue Service for tax fraud, it's important to take the issue seriously. An attorney who handles white collar crimes like tax fraud can help you assess the situation and determine what may have spurred the investigation -- and what you need to do in response.

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