Tax Evasion vs. Tax Avoidance

Following the leak of the Panama Papers earlier this year, there has been much talk about tax evasion and tax avoidance and cracking down on the global elite to make sure they pay their taxes. These two terms are often used in a way that might make it seem like they are interchangeable. However, it is critical to note that the terms “tax evasion” and “tax avoidance” are not synonymous. So, what’s the different between tax evasion and tax avoidance? Let’s take a look.

Tax Avoidance: A Legal Way to Minimize Your Tax Burden

Tax avoidance refers to the use of perfectly legally strategies that allow you to minimize your tax burden. Many people utilize tax avoidance strategies on a small scale in order to avoid paying taxes. For example, if you’re in the United Kingdom, you might save money into an ISA so you don’t have to pay income tax or capital gains tax on the funds.

Tax avoidance also takes place on a larger scale. For example, the global elite will often hire accountants to exploit certain loopholes to minimize their tax bill. They might store some of their money in an offshore account or set up some kind of shadow company offshores. For example, a businessman from a country with a volatile political situation that sets up an offshore account in order to protect his assets should a Leftist regime take control is engaging in tax avoidance, not tax evasion. While the ethics of this strategy are certainly debatable, it is important to note that no one is actually breaking the law. In essence, tax avoidance is analogous to bending the rules as opposed to totally breaking them.

Tax Evasion: A Crime with Legal Repercussions

Unlike tax avoidance, tax evasion is indeed illegal. It is a criminal act because it involves actively attempting to deceive tax authorities concerning what your tax bill should be. Examples of tax evasion include failing to file a tax return, failing to declare your full taxable income, and intentionally hiding certain assets so that they won’t be taxed. Evading taxes can have some serious repressions, including fines and jail time.

Ultimately, it is important to note that the line between tax evasion and tax avoidance often isn’t entirely clear. Therefore, if you are in doubt, it is in your best interest to contact a tax professional.