How to Tell the Difference Between Tax Avoidance and Tax Evasion

Posted on February 15, 2010 by Bill Faiferlick

Bill Faiferlick Tax AvoidanceGiven the recently issued Obama Greenbook, it is important to remember an important distinction regarding the difference between tax avoidance and tax evasion. There is nothing illegal about using tax effective strategies to protect and retain your hard earned income especially with a government that is intent on taxing you at the highest level. And that level is increasing as we speak.

Due to harsher and more punitive penalties being imposed by the IRS, individuals lose sight of the important difference involving legitimate tax planning for tax avoidance purposes and tax evasion. There seems to be a panic and fear of using legitimate means to avoid or reduce taxes, however, the IRS has clearly defined the difference in law between avoidance and evasion.

The Difference Between Tax Avoidance and Tax Evasion According to the IRS Internal Revenue Manual, Section 9.1:

[9.1] 3.3.2.1  (07-29-1998)Avoidance Distinguished from Evasion
  1. Avoidance of taxes is not a criminal offense. Any attempt to reduce, avoid, minimize, or alleviate taxes by legitimate means is permissible. The distinction between avoidance and evasion is fine, yet definite. One who avoids tax does not conceal or misrepresent. He shapes events to reduce or eliminate tax liability and, upon the happening of the events, makes a complete disclosure. Evasion, on the other hand, involves deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events, or makes things seem other than they are. A simple example, the creation of a bona fide partnership to reduce the tax liability of a business by dividing the income among several individual partners is tax avoidance. However, the facts of a particular case may show that an alleged partnership was not, in fact, established and that one or more of the alleged partners secretly returned his or her share of the profits to the real owner of the business, who, in turn, did not report this income. This would be an instance of attempted evasion.

The IRS continues to change legislation to prevent Americans from acquiring and maintaining their wealth through increasing taxation using the fear as the first line of enforcement. It is always easier to tax the wealthy – those having incomes of $250,000 a year or more. As the IRS became aware of more opportunities to increase their coffers, laws have and will continue to change reducing the options available to preserve wealth and reduce taxes.

The current administration seems preoccupied with taxing those taxpayers who are essential to economic growth in the US -businesses and professionals- utilizing whatever means they have at their disposal including the passage of progressively more punitive tax laws. It is imperative that you are able to associate with a professional who knows the difference between tax avoidance and tax evasion. The alternative is to simply lay your wallet on the table and let the government tell you how much you can keep.

Other opportunities which address specific needs certainly do exist but fewer professionals within the US either possess enough international knowledge or choose to take the path of least resistance and advocate that there are no solutions. This is being promoted because recent laws which govern and impose fines and penalties for your tax preparer and attorneys preclude any incentive to work for the client’s best interest. The perception that there is nothing left may be true as far as they can or are willing to recommend, but in a global community there are options.