The terms tax evasion and tax avoidance may sound similar to you. You may even mistakenly confuse one with the other. However, although they may sound similar, they are actually completely different. It is important for you to understand the differences between tax evasion and tax avoidance, the most significant of which is that one is a crime, while the other is not.
Tax avoidance is not illegal. It refers to the practice of trying to lessen your tax liability by claiming any income adjustments, credits or deductions for which you are eligible when you file your income taxes. For example, families may be able to claim deductions for the number of people in their household, and parents may qualify for credits related to child care expenses. The Internal Revenue Service provides many legal methods of limiting your tax obligation.
However, according to the IRS, tax evasion is a crime that involves paying less in taxes than you owe, or paying no taxes at all, by not reporting your income in total. For example, if you made money babysitting, by holding a garage sale or working for tips and you purposely did not report it to the IRS, you could go to court for tax evasion even though you earned the income legally. Furthermore, if you were to gain money through illegal activity, such as selling stolen goods, and you did not report it on income tax forms, you also face criminal charges of tax evasion in addition to whatever criminal charges might apply for the initial illegal activity by which you gained the money.
Federal income taxes operate via a system of voluntary compliance. This makes it the taxpayer’s responsibility to file taxes on time, calculate tax liability correctly and report income freely and fully.