🕷️ Crawler Inspector

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Raw Queries and Responses

1. Shard Calculation

Query:

Response:

Calculated Shard: 45 (from laksa027)

2. Crawled Status Check

Query:

curl -X POST \
  'http://laksa045.int.ahrefs:8124/' \
  -H 'Content-Type: text/plain' \
  -H 'X-ClickHouse-Database: crawler3' \
  -H 'Authorization: Basic YXBpOg==' \
  -d 'SELECT getAhrefsURLFromUnparsed(src_unparsed) AS found_url, ifNull(toUnixTimestamp(download_stamp), 0) AS crawl_time, ifNull(toUnixTimestamp(props_url_first_seen), 0) AS first_indexed_time, download_http_code AS http_code, src_unparsed AS src_unparsed, src_root_hash AS src_root_hash, history_drop_reason AS history_drop_reason, meta_title AS meta_title, meta_descriptions AS meta_descriptions, attrs_boilerpipe_text AS attrs_boilerpipe_text, attrs_markdown AS attrs_markdown, attrs_readable_markdown AS attrs_readable_markdown, meta_canonical AS meta_canonical FROM crawler3.page_info_local FINAL PREWHERE (src_root_hash, src_unparsed) IN ((getAhrefsRootHashFromUnparsed(getAhrefsUnparsedNoserviceFromURL(\'https://taxcure.com/blog/tax-avoidance-vs-tax-evasion\')), getAhrefsUnparsedNoserviceFromURL(\'https://taxcure.com/blog/tax-avoidance-vs-tax-evasion\'))) FORMAT JSONEachRow'

Response:

{"found_url":"https:\/\/taxcure.com\/blog\/tax-avoidance-vs-tax-evasion","crawl_time":1775751724,"first_indexed_time":1627062191,"http_code":200,"src_unparsed":"com,taxcure!\/blog\/tax-avoidance-vs-tax-evasion s443","src_root_hash":"273305045542669645","history_drop_reason":null,"meta_title":"Tax Avoidance vs. Tax Evasion: Which One Is Illegal?","meta_descriptions":["Tax avoidance uses legal methods to reduce tax bills. Tax evasion is illegally reducing taxes by not reporting income, hiding assets, or falsifying documents."],"attrs_boilerpipe_text":"Tax avoidance and\ntax evasion\n both reduce your tax bill. But tax avoidance involves using legal strategies to reduce how much tax you owe, while tax evasion is a crime punishable by fines and possible jail time. Staying on the right side of the law requires you to understand the distinctions between these two concepts - if in doubt, use TaxCure to find a tax professional to help you. \nKey takeaways\nTax avoidance\n- reducing your tax liability through legal tax planning strategies.\nTax evasion\n- taking illegal actions to evade paying taxes.\nExamples of tax avoidance\n- using tax-advantaged retirement accounts or strategically claiming business tax deductions. \nExamples of tax evasion\n- not reporting income or falsely claiming credits or deductions. \nConsequences of tax avoidance\n- a legally earned, lower tax bill. \nConsequences of tax evasion\n- the risk of facing legal charges, fines, and imprisonment.\nWhat is Tax Avoidance?\nTax avoidance is entirely\nlegal\n. It’s even quite common – something as simple as putting money into a 401(k) or an IRA is a tax avoidance strategy. Taxpayers may also legally reduce their tax liabilities by claiming deductions or credits like the \nearned income tax credit\n.\nBecause the tax code is so complicated, especially for businesses and high-income earners with lots of investments, many taxpayers pay professional tax preparers to help them create tax plans centered around tax avoidance strategies. \nWhat is Tax Evasion?\nTax evasion involves taking willful steps to avoid paying taxes that you legally owe. Evasion may take the form of not filing tax returns, not reporting all of your income, hiding income from offshore assets, claiming credits you don't qualify for, or taking other illegal actions to avoid a tax liability.  \nTax evasion is a type of\ntax fraud\n, and it's always criminal. In contrast, tax fraud may be either criminal or civil. \nTax Avoidance vs. Tax Evasion: What is the Difference?\nThe difference between tax evasion and tax avoidance is that evasion is illegal and avoidance is legal. To help you understand the distinction, check out the following table and then, let's look at a couple of examples. \n \nTax Evasion\nTax Avoidance\nLegality\nIllegal\nLegal\nIRS perspective\nBanned\nEncouraged\nConsequences\nCriminal charges, fines, and imprisonment\nReduced tax bill\nNow for the examples. Say you contribute $6000 to a 401(k) or an IRA. The contribution reduces your taxable income and by extension reduces your tax liability. That is a legal tax avoidance strategy. \nIn contrast, imagine you put $6000 in a savings account and then, you write off that amount as a tax-deductible retirement contribution on your tax return. That is not legal. That is tax evasion. Even if you're saving the money for retirement, it must be in a special type of account to give you a tax deduction. \nHere's another example. Say that your business buys equipment for $50,000. You can generally choose between deprecating the asset slowly over time or using a Section 179 deduction to claim the entire amount in the year of purchase. The Section 179 deduction has the power to dramatically reduce your tax bill - it's a legal tax avoidance strategy. \nNow, say that you buy a $50,000 car for personal use, but you write it off through your business. That is not legal. You cannot legally write off personal expenses. That is tax evasion. \nNote, however, that tax evasion requires willful intent - if you made a mistake, the IRS may simply adjust your return and assess a penalty rather than pursue criminal charges. \nExamples of Tax Avoidance\nThere are several different ways to engage in tax avoidance. If you have a complicated tax situation, you may want to consult with a tax professional about advanced tax planning strategies that can help you legally avoid paying taxes as much as possible. A tax professional can be indispensable, especially since there's often\nnew tax legislation\nand the rules change frequently.\nHere are some examples of tax avoidance strategies:\nTax-advantaged retirement accounts\n- you don't have to pay income tax on income contributed to 401(k)s, IRAs, or other tax-advantaged retirement accounts, but there are limits on these contributions. \nHealth savings accounts\n- you don't face income tax on income contributed to Health Savings Accounts (HSA) or Flexible Spending Accounts (FSA), but again, you must meet certain requirements and can only contribute a certain amount. \nLoss harvesting\n- if you sell investments at a loss, you may be able to offset capital gains and possibly a small amount of earned income, helping to lower your overall tax liability. \nCharitable donations\n- if you itemize deductions, you can claim a deduction for cash or assets donated to charity. Even if you don't itemize you may be able to claim a state deduction. Corporations can also claim deductions for giving to charity.\nItemizing deductions\n- individuals can claim a standard deduction or they can itemize. If the total of your itemized deductions (medical expenses over a certain threshold, mortgage interest, state and local taxes, charitable donations, etc) is more than the standard deduction, you should carefully track all of these expenses to ensure you avoid as much tax as legally possible. \n1031 exchange property\n- you can avoid paying tax on capital gains from real estate sales if you buy a substantially similar type of property within a strict time frame. This helps you avoid tax in the year of the exchange, but note that it only defers the gain; it doesn't eliminate the tax permanently.\nMunicipal bonds\n- the interest earned from municipal bonds is tax-free, unlike the interest from most other investments. \nStrategic depreciation of business assets\n - with the right strategies, you can minimize your tax liability while growing your business. For instance, if you buy equipment using a loan, you can claim the full price of the equipment as a Section 179 deduction in the year of purchase which reduces your tax liability, but because you bought the asset using a loan, you pay for it slowly over time. That lets you enjoy the tax benefit upfront, without having to come up with all the cash to buy the asset right away. \nNet operating losses\n- if your business has a net operating loss, you can use that loss to reduce other business income or roll it forward to offset business income in future tax years. \nThis is not an exhaustive list. There are all kinds of ways to legally reduce your tax bill, and if you own a business, you should consult with a tax planner to talk about strategies.\nExamples of Tax Evasion\nHere are some of the willful acts that may be considered tax evasion:\nUnderreporting or not reporting income\n- for example, not reporting cash payments received by your business or hiding income related to foreign assets such as rental income from a property in another country or interest earned on a\nforeign bank account\n. \nNot reporting illegal income\n- by law, you are supposed to report all income, even if it was earned from illegal activities. For example, Al Capone was convicted of tax evasion for not reporting his illegal source income. \nClaiming credits you're not entitled to\n- for instance, claiming an\nemployee retention credit\nwhen you didn't meet all of the criteria or making up fake dependents to claim a credit for other dependents. \nSaying you're a resident of another state to avoid taxes\n- setting up an address and falsely claiming that you live in a state with no income tax or low taxes is a form of tax evasion - however, this is committed against the state where you have actual residency not against the federal government. In fact,\nresidency audits\nare very common in New York State for this very reason. \nFalsifying records to evade taxes\n- for instance, keeping two sets of books for your business and then if you are audited, providing the IRS with the books that show a lower tax liability. \nRemember, that tax evasion is always a crime, but it's not always possible for the IRS to prove that a taxpayer's actions rise to the level of tax evasion. As a result, the IRS often pursues tax fraud charges instead of tax evasion. Tax fraud can be criminal or civil. If the IRS believes that you have committed a crime, they may recommend criminal persecution, but often, they just pursue civil fraud penalties which are 75% of the underreported or underpaid tax. \nWhat Are the Consequences of Tax Evasion?\nAccording to Section 7201 of the Internal Revenue Code, the penalty for tax evasion is up to $100,000 for individuals and up to $500,000 for corporations with imprisonment of up to five years. Again tax evasion is a willful attempt to illegally avoid paying taxes. To be found guilty of tax evasion, you must have had specific intent to evade a known duty to pay tax, and you must have taken affirmative action to do so. \nWhat Should You Do If You Committed Tax Evasion?\nIf you have willfully attempted to evade taxes, you may need to come clean through the IRS's Criminal Investigation\nVoluntary Disclosure Program\n (VDP). However, you should not use this program if you simply\nmade a mistake\n- in that case, you should\namend the tax returns\nthat were filed incorrectly. To learn which option is right for your situation, contact a tax professional today. \nWhat Should You Do If You Think You Overpaid Tax?\nIf you believe that you overpaid tax due to not claiming credits or deductions properly or due to a lack of tax planning, consider having a professional review your old tax return(s). If they see any unutilized tax avoidance strategies, they can help you amend returns. You have up to three years from the original due date to claim a refund.\nAre Tax Shelters Tax Avoidance or Evasion?\nLegal tax shelters are a form of tax avoidance. However, there are many abusive tax shelters that fall under the umbrella of tax evasion. The IRS requires taxpayers to disclose their participation in certain tax shelters on their tax returns so the agency can monitor these transactions for signs of illegality. The IRS also has a hotline taxpayers can call to report abusive tax shelters. \nAre Tax Loopholes Legal?\nYes, tax loopholes typically refer to legal strategies that reduce your tax liability. A loophole is generally considered to be a legal exception to the rule. \nWhat Is the Underground Economy?\nAccording to the IRS, the underground economy refers to all of the income not reported to the IRS earned from both legal and illegal activities. For instance, say your legal retail business earns $300,000 in profits, but you only report $200,000. The $100,000 that you didn't report is part of the underground economy. Or say that you sell illegal drugs, you earn $20,000, and you don't report any of it, that is also part of the underground economy. \nFinding a Tax Relief Program That Works\nEven with a dedicated approach to tax avoidance, many people still wind up owing the IRS at the end of the year. Moreover, for some families, owing money to the IRS or state creates a severe burden that snowballs over the next year. There are options for people who are struggling to pay their taxes. To find the right\ntax relief program\n, a professional tax firm can help narrow down the right option for each situation.","attrs_markdown":"[![TaxCure Logo](https:\/\/taxcure.com\/blog\/assets\/images\/logo\/taxcure@2x.png)](https:\/\/taxcure.com\/)\n\nFind a Local Tax Pro\n\n[![Taxcure Phone](https:\/\/taxcure.com\/assets\/images\/noun_Phone_3324301-2@2x.png)](tel:+1866-517-7550)\n\n- [Understand Tax Issues & Solutions![arrow down](https:\/\/taxcure.com\/assets\/icons\/angle-down-solid.svg)](https:\/\/taxcure.com\/blog\/tax-avoidance-vs-tax-evasion)\n  - [IRS Solutions](https:\/\/taxcure.com\/tax-solutions)\n  - [Appeals](https:\/\/taxcure.com\/tax-appeals)\n  - [Hardship Status](https:\/\/taxcure.com\/hardship)\n  - [Innocent Spouse Relief](https:\/\/taxcure.com\/tax-settlement\/innocent-spouse-relief)\n  - [Offer In Compromise](https:\/\/taxcure.com\/tax-settlement\/offer-in-compromise)\n  - [Payment Plans](https:\/\/taxcure.com\/irs-payment-plans)\n  - [Tax Relief Services](https:\/\/taxcure.com\/tax-relief-service)\n  - 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[Review of IRS Collection](https:\/\/taxcure.com\/resources\/irs-tax-collections)\n  - [Review of Tax Filings](https:\/\/taxcure.com\/tax-filings)\n  - [Review of Various Tax Professionals](https:\/\/taxcure.com\/tax-professional)\n  - [More Other Resources](https:\/\/taxcure.com\/resources)\n- [About TaxCure![arrow down](https:\/\/taxcure.com\/assets\/icons\/angle-down-solid.svg)](https:\/\/taxcure.com\/about)\n  - [Why Use TaxCure](https:\/\/taxcure.com\/about\/why-use-taxcure)\n  - [How to Use TaxCure](https:\/\/taxcure.com\/how-to-use-taxcure)\n  - [Our Team](https:\/\/taxcure.com\/team)\n  - [TaxCure Blog](https:\/\/taxcure.com\/blog)\n  - [Contact Us](https:\/\/taxcure.com\/contact)\n\n- [![Taxcure Phone](https:\/\/taxcure.com\/assets\/images\/noun_Phone_3324301-2@2x.png)Call TaxCure: 866-517-7550](tel:+1866-517-7550)\n- For Tax Professionals\n\n[TaxCure's Blog](https:\/\/taxcure.com\/blog)\n\n# Tax Avoidance vs. Tax Evasion: Which One Is Illegal?\nMarch 12, 2025\n\nBy: [Charles P. Corsello, EA](https:\/\/taxcure.com\/professionals\/charles-p-corsello\/profile)\\|Reviewed by: [Kari Brummond, EA](https:\/\/taxcure.com\/professionals\/kari-brummond-4b0a3b32-907c-440e-9d3e-5c1f1d8521bb\/profile)\n\n![Tax Avoidance vs Tax Evasion](https:\/\/images.taxcure.com\/featured_images\/featured_image\/41\/image\/Tax_Avoidance_vs._Tax_Evasion.jpg)\n\nTax avoidance and [tax evasion](https:\/\/taxcure.com\/tax-problems\/tax-penalties\/tax-evasion) both reduce your tax bill. But tax avoidance involves using legal strategies to reduce how much tax you owe, while tax evasion is a crime punishable by fines and possible jail time. Staying on the right side of the law requires you to understand the distinctions between these two concepts - if in doubt, use TaxCure to find a tax professional to help you.\n\nKey takeaways\n\n- **Tax avoidance** - reducing your tax liability through legal tax planning strategies.\n- **Tax evasion** - taking illegal actions to evade paying taxes.\n- **Examples of tax avoidance** - using tax-advantaged retirement accounts or strategically claiming business tax deductions.\n- **Examples of tax evasion** - not reporting income or falsely claiming credits or deductions.\n- **Consequences of tax avoidance** - a legally earned, lower tax bill.\n- **Consequences of tax evasion** - the risk of facing legal charges, fines, and imprisonment.\n## What is Tax Avoidance?\nTax avoidance is entirely *legal*. It’s even quite common – something as simple as putting money into a 401(k) or an IRA is a tax avoidance strategy. Taxpayers may also legally reduce their tax liabilities by claiming deductions or credits like the [earned income tax credit](https:\/\/www.irs.gov\/credits-deductions\/individuals\/earned-income-tax-credit\/do-i-qualify-for-earned-income-tax-credit-eitc).\n\nBecause the tax code is so complicated, especially for businesses and high-income earners with lots of investments, many taxpayers pay professional tax preparers to help them create tax plans centered around tax avoidance strategies.\n\n## What is Tax Evasion?\nTax evasion involves taking willful steps to avoid paying taxes that you legally owe. Evasion may take the form of not filing tax returns, not reporting all of your income, hiding income from offshore assets, claiming credits you don't qualify for, or taking other illegal actions to avoid a tax liability.\n\nTax evasion is a type of [tax fraud](https:\/\/taxcure.com\/tax-problems\/tax-penalties\/tax-fraud-penalties), and it's always criminal. In contrast, tax fraud may be either criminal or civil.\n\n## Tax Avoidance vs. Tax Evasion: What is the Difference?\nThe difference between tax evasion and tax avoidance is that evasion is illegal and avoidance is legal. To help you understand the distinction, check out the following table and then, let's look at a couple of examples.\n\n|   |   |   |\n|---|---|---|\n|   | **Tax Evasion** | **Tax Avoidance** |\n| **Legality** | Illegal | Legal |\n| **IRS perspective** | Banned | Encouraged |\n| **Consequences** | Criminal charges, fines, and imprisonment | Reduced tax bill |\n\nNow for the examples. Say you contribute \\$6000 to a 401(k) or an IRA. The contribution reduces your taxable income and by extension reduces your tax liability. That is a legal tax avoidance strategy.\n\nIn contrast, imagine you put \\$6000 in a savings account and then, you write off that amount as a tax-deductible retirement contribution on your tax return. That is not legal. That is tax evasion. Even if you're saving the money for retirement, it must be in a special type of account to give you a tax deduction.\n\nHere's another example. Say that your business buys equipment for \\$50,000. You can generally choose between deprecating the asset slowly over time or using a Section 179 deduction to claim the entire amount in the year of purchase. The Section 179 deduction has the power to dramatically reduce your tax bill - it's a legal tax avoidance strategy.\n\nNow, say that you buy a \\$50,000 car for personal use, but you write it off through your business. That is not legal. You cannot legally write off personal expenses. That is tax evasion.\n\nNote, however, that tax evasion requires willful intent - if you made a mistake, the IRS may simply adjust your return and assess a penalty rather than pursue criminal charges.\n\n## Examples of Tax Avoidance\nThere are several different ways to engage in tax avoidance. If you have a complicated tax situation, you may want to consult with a tax professional about advanced tax planning strategies that can help you legally avoid paying taxes as much as possible. A tax professional can be indispensable, especially since there's often [new tax legislation](https:\/\/taxcure.com\/blog\/new-tax-legislation) and the rules change frequently.\n\nHere are some examples of tax avoidance strategies:\n\n- **Tax-advantaged retirement accounts** \\- you don't have to pay income tax on income contributed to 401(k)s, IRAs, or other tax-advantaged retirement accounts, but there are limits on these contributions.\n- **Health savings accounts** - you don't face income tax on income contributed to Health Savings Accounts (HSA) or Flexible Spending Accounts (FSA), but again, you must meet certain requirements and can only contribute a certain amount.\n- **Loss harvesting** - if you sell investments at a loss, you may be able to offset capital gains and possibly a small amount of earned income, helping to lower your overall tax liability.\n- **Charitable donations** - if you itemize deductions, you can claim a deduction for cash or assets donated to charity. Even if you don't itemize you may be able to claim a state deduction. Corporations can also claim deductions for giving to charity.\n- **Itemizing deductions** - individuals can claim a standard deduction or they can itemize. If the total of your itemized deductions (medical expenses over a certain threshold, mortgage interest, state and local taxes, charitable donations, etc) is more than the standard deduction, you should carefully track all of these expenses to ensure you avoid as much tax as legally possible.\n- **1031 exchange property** - you can avoid paying tax on capital gains from real estate sales if you buy a substantially similar type of property within a strict time frame. This helps you avoid tax in the year of the exchange, but note that it only defers the gain; it doesn't eliminate the tax permanently.\n- **Municipal bonds** - the interest earned from municipal bonds is tax-free, unlike the interest from most other investments.\n- **Strategic depreciation of business assets** - with the right strategies, you can minimize your tax liability while growing your business. For instance, if you buy equipment using a loan, you can claim the full price of the equipment as a Section 179 deduction in the year of purchase which reduces your tax liability, but because you bought the asset using a loan, you pay for it slowly over time. That lets you enjoy the tax benefit upfront, without having to come up with all the cash to buy the asset right away.\n- **Net operating losses** - if your business has a net operating loss, you can use that loss to reduce other business income or roll it forward to offset business income in future tax years.\n\nThis is not an exhaustive list. There are all kinds of ways to legally reduce your tax bill, and if you own a business, you should consult with a tax planner to talk about strategies.\n\n## Examples of Tax Evasion\nHere are some of the willful acts that may be considered tax evasion:\n\n- **Underreporting or not reporting income** - for example, not reporting cash payments received by your business or hiding income related to foreign assets such as rental income from a property in another country or interest earned on a [foreign bank account](https:\/\/taxcure.com\/tax-problems\/fbar).\n- **Not reporting illegal income** \\- by law, you are supposed to report all income, even if it was earned from illegal activities. For example, Al Capone was convicted of tax evasion for not reporting his illegal source income.\n- **Claiming credits you're not entitled to** - for instance, claiming an [employee retention credit](https:\/\/taxcure.com\/tax-problems\/tax-audit\/erc-audit) when you didn't meet all of the criteria or making up fake dependents to claim a credit for other dependents.\n- **Saying you're a resident of another state to avoid taxes** - setting up an address and falsely claiming that you live in a state with no income tax or low taxes is a form of tax evasion - however, this is committed against the state where you have actual residency not against the federal government. In fact, [residency audits](https:\/\/taxcure.com\/state-taxes\/new-york\/residency-audit) are very common in New York State for this very reason.\n- **Falsifying records to evade taxes** \\- for instance, keeping two sets of books for your business and then if you are audited, providing the IRS with the books that show a lower tax liability.\n\nRemember, that tax evasion is always a crime, but it's not always possible for the IRS to prove that a taxpayer's actions rise to the level of tax evasion. As a result, the IRS often pursues tax fraud charges instead of tax evasion. Tax fraud can be criminal or civil. If the IRS believes that you have committed a crime, they may recommend criminal persecution, but often, they just pursue civil fraud penalties which are 75% of the underreported or underpaid tax.\n\n## What Are the Consequences of Tax Evasion?\nAccording to Section 7201 of the Internal Revenue Code, the penalty for tax evasion is up to \\$100,000 for individuals and up to \\$500,000 for corporations with imprisonment of up to five years. Again tax evasion is a willful attempt to illegally avoid paying taxes. To be found guilty of tax evasion, you must have had specific intent to evade a known duty to pay tax, and you must have taken affirmative action to do so.\n\n## What Should You Do If You Committed Tax Evasion?\nIf you have willfully attempted to evade taxes, you may need to come clean through the IRS's Criminal Investigation [Voluntary Disclosure Program](https:\/\/taxcure.com\/tax-solutions\/criminal-voluntary-disclosure) (VDP). However, you should not use this program if you simply [made a mistake](https:\/\/taxcure.com\/tax-problems\/mistake-tax-return) - in that case, you should [amend the tax returns](https:\/\/taxcure.com\/tax-filings\/amend-tax-return) that were filed incorrectly. To learn which option is right for your situation, contact a tax professional today.\n\n## What Should You Do If You Think You Overpaid Tax?\nIf you believe that you overpaid tax due to not claiming credits or deductions properly or due to a lack of tax planning, consider having a professional review your old tax return(s). If they see any unutilized tax avoidance strategies, they can help you amend returns. You have up to three years from the original due date to claim a refund.\n\n## Are Tax Shelters Tax Avoidance or Evasion?\nLegal tax shelters are a form of tax avoidance. However, there are many abusive tax shelters that fall under the umbrella of tax evasion. The IRS requires taxpayers to disclose their participation in certain tax shelters on their tax returns so the agency can monitor these transactions for signs of illegality. The IRS also has a hotline taxpayers can call to report abusive tax shelters.\n\n## Are Tax Loopholes Legal?\nYes, tax loopholes typically refer to legal strategies that reduce your tax liability. A loophole is generally considered to be a legal exception to the rule.\n\n## What Is the Underground Economy?\nAccording to the IRS, the underground economy refers to all of the income not reported to the IRS earned from both legal and illegal activities. For instance, say your legal retail business earns \\$300,000 in profits, but you only report \\$200,000. The \\$100,000 that you didn't report is part of the underground economy. Or say that you sell illegal drugs, you earn \\$20,000, and you don't report any of it, that is also part of the underground economy.\n\n## Finding a Tax Relief Program That Works\nEven with a dedicated approach to tax avoidance, many people still wind up owing the IRS at the end of the year. Moreover, for some families, owing money to the IRS or state creates a severe burden that snowballs over the next year. There are options for people who are struggling to pay their taxes. To find the right [tax relief program](https:\/\/taxcure.com\/tax-professional\/worst-tax-relief-companies), a professional tax firm can help narrow down the right option for each situation.\n\nLocal Tax Problem Professionals\n\nHarry Hearn\n\nCPA at Harry C. Hearn, Inc.\n\n![Harry Hearn headshot](https:\/\/images.taxcure.com\/uploads\/user\/avatar\/816\/thumb_thumb_1608313712448.webp)\n\nServing Nationwide\n\nColumbia, Maryland\n\n[View Profile](https:\/\/taxcure.com\/professionals\/harry-hearn\/profile)\n\n![mail](https:\/\/taxcure.com\/assets\/images\/noun_Mail_748976@2x.png)Message\n\n![Taxcure Phone](https:\/\/taxcure.com\/assets\/images\/noun_Phone_3324301-2@2x.png)Call Harry\n\nGrace Castro, EA, CAA\n\nEA at Midland LDU Insurance & Tax Services\n\n![Grace Castro, EA, CAA headshot](https:\/\/images.taxcure.com\/uploads\/user\/avatar\/1393\/thumb_grace.webp)\n\nServing Nationwide\n\nFranklin Park, Illinois\n\n![TaxCure](https:\/\/taxcure.com\/assets\/icons\/favicon\/normal\/favicon.ico)\n\n5\\.0\n\n6 reviews\n\n![Google](https:\/\/taxcure.com\/assets\/icons\/google.svg)\n\n5\\.0\n\n67 reviews\n\n[View Profile](https:\/\/taxcure.com\/professionals\/grace-castro-ea\/profile)\n\n![mail](https:\/\/taxcure.com\/assets\/images\/noun_Mail_748976@2x.png)Message\n\n![Taxcure Phone](https:\/\/taxcure.com\/assets\/images\/noun_Phone_3324301-2@2x.png)Call Grace\n\nAnna Mace\n\nEA at AM Tax Defense\n\n![Anna Mace headshot](https:\/\/images.taxcure.com\/uploads\/user\/avatar\/1733\/thumb_my_photo.webp)\n\nServing Nationwide\n\nMiami, Florida\n\n![TaxCure](https:\/\/taxcure.com\/assets\/icons\/favicon\/normal\/favicon.ico)\n\n5\\.0\n\n6 reviews\n\n[View Profile](https:\/\/taxcure.com\/professionals\/anna-mace\/profile)\n\n![mail](https:\/\/taxcure.com\/assets\/images\/noun_Mail_748976@2x.png)Message\n\n![Taxcure Phone](https:\/\/taxcure.com\/assets\/images\/noun_Phone_3324301-2@2x.png)Call Anna\n\nSteven Litteer\n\nEA at McLaud Law P.C.\n\n![Steven Litteer headshot](https:\/\/images.taxcure.com\/uploads\/user\/avatar\/903\/thumb_thumb_Steve_at_Desk_Close_up.webp)\n\nServing Nationwide\n\nRochester, New York\n\n![TaxCure](https:\/\/taxcure.com\/assets\/icons\/favicon\/normal\/favicon.ico)\n\n5\\.0\n\n10 reviews\n\n![Google](https:\/\/taxcure.com\/assets\/icons\/google.svg)\n\n4\\.8\n\n48 reviews\n\n[View Profile](https:\/\/taxcure.com\/professionals\/steven-litteer\/profile)\n\n![mail](https:\/\/taxcure.com\/assets\/images\/noun_Mail_748976@2x.png)Message\n\n![Taxcure Phone](https:\/\/taxcure.com\/assets\/images\/noun_Phone_3324301-2@2x.png)Call Steven\n\nTimothy S. Hart\n\nTax Attorney & CPA at Timothy S Hart Law Group PC\n\n![Timothy S. Hart headshot](https:\/\/images.taxcure.com\/uploads\/user\/avatar\/258\/thumb_Screenshot_2024-06-10_at_2.18.38_AM.webp)\n\nServing Nationwide\n\nNew York, New York\n\n![TaxCure](https:\/\/taxcure.com\/assets\/icons\/favicon\/normal\/favicon.ico)\n\n5\\.0\n\n7 reviews\n\n![Google](https:\/\/taxcure.com\/assets\/icons\/google.svg)\n\n5\\.0\n\n26 reviews\n\n[View Profile](https:\/\/taxcure.com\/professionals\/timothy-s-hart\/profile)\n\n![mail](https:\/\/taxcure.com\/assets\/images\/noun_Mail_748976@2x.png)Message\n\n![Taxcure Phone](https:\/\/taxcure.com\/assets\/images\/noun_Phone_3324301-2@2x.png)Call Timothy\n\n© TaxCure LLC. All Rights Reserved 2026.\n\n- [Home](https:\/\/taxcure.com\/)\n- [About TaxCure](https:\/\/taxcure.com\/about)\n- [Blog](https:\/\/taxcure.com\/blog)\n- [Team](https:\/\/taxcure.com\/team)\n- [Contact Us](https:\/\/taxcure.com\/contact)\n- [Terms of Use](https:\/\/taxcure.com\/terms-of-use)\n- [Privacy Policy](https:\/\/taxcure.com\/privacy-policy)\n- [Tax Companies](https:\/\/taxcure.com\/companies)\n- [Professional Directory](https:\/\/taxcure.com\/directory)\n- [Sitemap](https:\/\/taxcure.com\/sitemap)\n- [For Tax Professionals](https:\/\/taxcure.com\/professionals\/home)\n\n[![ClickCease](https:\/\/monitor.clickcease.com\/)](https:\/\/www.clickcease.com\/)","attrs_readable_markdown":"Tax avoidance and [tax evasion](https:\/\/taxcure.com\/tax-problems\/tax-penalties\/tax-evasion) both reduce your tax bill. But tax avoidance involves using legal strategies to reduce how much tax you owe, while tax evasion is a crime punishable by fines and possible jail time. Staying on the right side of the law requires you to understand the distinctions between these two concepts - if in doubt, use TaxCure to find a tax professional to help you.\n\nKey takeaways\n\n- **Tax avoidance** - reducing your tax liability through legal tax planning strategies.\n- **Tax evasion** - taking illegal actions to evade paying taxes.\n- **Examples of tax avoidance** - using tax-advantaged retirement accounts or strategically claiming business tax deductions.\n- **Examples of tax evasion** - not reporting income or falsely claiming credits or deductions.\n- **Consequences of tax avoidance** - a legally earned, lower tax bill.\n- **Consequences of tax evasion** - the risk of facing legal charges, fines, and imprisonment.\n## What is Tax Avoidance?\nTax avoidance is entirely *legal*. It’s even quite common – something as simple as putting money into a 401(k) or an IRA is a tax avoidance strategy. Taxpayers may also legally reduce their tax liabilities by claiming deductions or credits like the [earned income tax credit](https:\/\/www.irs.gov\/credits-deductions\/individuals\/earned-income-tax-credit\/do-i-qualify-for-earned-income-tax-credit-eitc).\n\nBecause the tax code is so complicated, especially for businesses and high-income earners with lots of investments, many taxpayers pay professional tax preparers to help them create tax plans centered around tax avoidance strategies.\n\n## What is Tax Evasion?\nTax evasion involves taking willful steps to avoid paying taxes that you legally owe. Evasion may take the form of not filing tax returns, not reporting all of your income, hiding income from offshore assets, claiming credits you don't qualify for, or taking other illegal actions to avoid a tax liability.\n\nTax evasion is a type of [tax fraud](https:\/\/taxcure.com\/tax-problems\/tax-penalties\/tax-fraud-penalties), and it's always criminal. In contrast, tax fraud may be either criminal or civil.\n\n## Tax Avoidance vs. Tax Evasion: What is the Difference?\nThe difference between tax evasion and tax avoidance is that evasion is illegal and avoidance is legal. To help you understand the distinction, check out the following table and then, let's look at a couple of examples.\n\n|   |   |   |\n|---|---|---|\n|   | **Tax Evasion** | **Tax Avoidance** |\n| **Legality** | Illegal | Legal |\n| **IRS perspective** | Banned | Encouraged |\n| **Consequences** | Criminal charges, fines, and imprisonment | Reduced tax bill |\n\nNow for the examples. Say you contribute \\$6000 to a 401(k) or an IRA. The contribution reduces your taxable income and by extension reduces your tax liability. That is a legal tax avoidance strategy.\n\nIn contrast, imagine you put \\$6000 in a savings account and then, you write off that amount as a tax-deductible retirement contribution on your tax return. That is not legal. That is tax evasion. Even if you're saving the money for retirement, it must be in a special type of account to give you a tax deduction.\n\nHere's another example. Say that your business buys equipment for \\$50,000. You can generally choose between deprecating the asset slowly over time or using a Section 179 deduction to claim the entire amount in the year of purchase. The Section 179 deduction has the power to dramatically reduce your tax bill - it's a legal tax avoidance strategy.\n\nNow, say that you buy a \\$50,000 car for personal use, but you write it off through your business. That is not legal. You cannot legally write off personal expenses. That is tax evasion.\n\nNote, however, that tax evasion requires willful intent - if you made a mistake, the IRS may simply adjust your return and assess a penalty rather than pursue criminal charges.\n\n## Examples of Tax Avoidance\nThere are several different ways to engage in tax avoidance. If you have a complicated tax situation, you may want to consult with a tax professional about advanced tax planning strategies that can help you legally avoid paying taxes as much as possible. A tax professional can be indispensable, especially since there's often [new tax legislation](https:\/\/taxcure.com\/blog\/new-tax-legislation) and the rules change frequently.\n\nHere are some examples of tax avoidance strategies:\n\n- **Tax-advantaged retirement accounts** \\- you don't have to pay income tax on income contributed to 401(k)s, IRAs, or other tax-advantaged retirement accounts, but there are limits on these contributions.\n- **Health savings accounts** - you don't face income tax on income contributed to Health Savings Accounts (HSA) or Flexible Spending Accounts (FSA), but again, you must meet certain requirements and can only contribute a certain amount.\n- **Loss harvesting** - if you sell investments at a loss, you may be able to offset capital gains and possibly a small amount of earned income, helping to lower your overall tax liability.\n- **Charitable donations** - if you itemize deductions, you can claim a deduction for cash or assets donated to charity. Even if you don't itemize you may be able to claim a state deduction. Corporations can also claim deductions for giving to charity.\n- **Itemizing deductions** - individuals can claim a standard deduction or they can itemize. If the total of your itemized deductions (medical expenses over a certain threshold, mortgage interest, state and local taxes, charitable donations, etc) is more than the standard deduction, you should carefully track all of these expenses to ensure you avoid as much tax as legally possible.\n- **1031 exchange property** - you can avoid paying tax on capital gains from real estate sales if you buy a substantially similar type of property within a strict time frame. This helps you avoid tax in the year of the exchange, but note that it only defers the gain; it doesn't eliminate the tax permanently.\n- **Municipal bonds** - the interest earned from municipal bonds is tax-free, unlike the interest from most other investments.\n- **Strategic depreciation of business assets** - with the right strategies, you can minimize your tax liability while growing your business. For instance, if you buy equipment using a loan, you can claim the full price of the equipment as a Section 179 deduction in the year of purchase which reduces your tax liability, but because you bought the asset using a loan, you pay for it slowly over time. That lets you enjoy the tax benefit upfront, without having to come up with all the cash to buy the asset right away.\n- **Net operating losses** - if your business has a net operating loss, you can use that loss to reduce other business income or roll it forward to offset business income in future tax years.\n\nThis is not an exhaustive list. There are all kinds of ways to legally reduce your tax bill, and if you own a business, you should consult with a tax planner to talk about strategies.\n\n## Examples of Tax Evasion\nHere are some of the willful acts that may be considered tax evasion:\n\n- **Underreporting or not reporting income** - for example, not reporting cash payments received by your business or hiding income related to foreign assets such as rental income from a property in another country or interest earned on a [foreign bank account](https:\/\/taxcure.com\/tax-problems\/fbar).\n- **Not reporting illegal income** \\- by law, you are supposed to report all income, even if it was earned from illegal activities. For example, Al Capone was convicted of tax evasion for not reporting his illegal source income.\n- **Claiming credits you're not entitled to** - for instance, claiming an [employee retention credit](https:\/\/taxcure.com\/tax-problems\/tax-audit\/erc-audit) when you didn't meet all of the criteria or making up fake dependents to claim a credit for other dependents.\n- **Saying you're a resident of another state to avoid taxes** - setting up an address and falsely claiming that you live in a state with no income tax or low taxes is a form of tax evasion - however, this is committed against the state where you have actual residency not against the federal government. In fact, [residency audits](https:\/\/taxcure.com\/state-taxes\/new-york\/residency-audit) are very common in New York State for this very reason.\n- **Falsifying records to evade taxes** \\- for instance, keeping two sets of books for your business and then if you are audited, providing the IRS with the books that show a lower tax liability.\n\nRemember, that tax evasion is always a crime, but it's not always possible for the IRS to prove that a taxpayer's actions rise to the level of tax evasion. As a result, the IRS often pursues tax fraud charges instead of tax evasion. Tax fraud can be criminal or civil. If the IRS believes that you have committed a crime, they may recommend criminal persecution, but often, they just pursue civil fraud penalties which are 75% of the underreported or underpaid tax.\n\n## What Are the Consequences of Tax Evasion?\nAccording to Section 7201 of the Internal Revenue Code, the penalty for tax evasion is up to \\$100,000 for individuals and up to \\$500,000 for corporations with imprisonment of up to five years. Again tax evasion is a willful attempt to illegally avoid paying taxes. To be found guilty of tax evasion, you must have had specific intent to evade a known duty to pay tax, and you must have taken affirmative action to do so.\n\n## What Should You Do If You Committed Tax Evasion?\nIf you have willfully attempted to evade taxes, you may need to come clean through the IRS's Criminal Investigation [Voluntary Disclosure Program](https:\/\/taxcure.com\/tax-solutions\/criminal-voluntary-disclosure) (VDP). However, you should not use this program if you simply [made a mistake](https:\/\/taxcure.com\/tax-problems\/mistake-tax-return) - in that case, you should [amend the tax returns](https:\/\/taxcure.com\/tax-filings\/amend-tax-return) that were filed incorrectly. To learn which option is right for your situation, contact a tax professional today.\n\n## What Should You Do If You Think You Overpaid Tax?\nIf you believe that you overpaid tax due to not claiming credits or deductions properly or due to a lack of tax planning, consider having a professional review your old tax return(s). If they see any unutilized tax avoidance strategies, they can help you amend returns. You have up to three years from the original due date to claim a refund.\n\n## Are Tax Shelters Tax Avoidance or Evasion?\nLegal tax shelters are a form of tax avoidance. However, there are many abusive tax shelters that fall under the umbrella of tax evasion. The IRS requires taxpayers to disclose their participation in certain tax shelters on their tax returns so the agency can monitor these transactions for signs of illegality. The IRS also has a hotline taxpayers can call to report abusive tax shelters.\n\n## Are Tax Loopholes Legal?\nYes, tax loopholes typically refer to legal strategies that reduce your tax liability. A loophole is generally considered to be a legal exception to the rule.\n\n## What Is the Underground Economy?\nAccording to the IRS, the underground economy refers to all of the income not reported to the IRS earned from both legal and illegal activities. For instance, say your legal retail business earns \\$300,000 in profits, but you only report \\$200,000. The \\$100,000 that you didn't report is part of the underground economy. Or say that you sell illegal drugs, you earn \\$20,000, and you don't report any of it, that is also part of the underground economy.\n\n## Finding a Tax Relief Program That Works\nEven with a dedicated approach to tax avoidance, many people still wind up owing the IRS at the end of the year. Moreover, for some families, owing money to the IRS or state creates a severe burden that snowballs over the next year. There are options for people who are struggling to pay their taxes. To find the right [tax relief program](https:\/\/taxcure.com\/tax-professional\/worst-tax-relief-companies), a professional tax firm can help narrow down the right option for each situation.","meta_canonical":null}

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Boilerpipe Text	Tax avoidance and tax evasion both reduce your tax bill. But tax avoidance involves using legal strategies to reduce how much tax you owe, while tax evasion is a crime punishable by fines and possible jail time. Staying on the right side of the law requires you to understand the distinctions between these two concepts - if in doubt, use TaxCure to find a tax professional to help you. Key takeaways Tax avoidance - reducing your tax liability through legal tax planning strategies. Tax evasion - taking illegal actions to evade paying taxes. Examples of tax avoidance - using tax-advantaged retirement accounts or strategically claiming business tax deductions. Examples of tax evasion - not reporting income or falsely claiming credits or deductions. Consequences of tax avoidance - a legally earned, lower tax bill. Consequences of tax evasion - the risk of facing legal charges, fines, and imprisonment. What is Tax Avoidance? Tax avoidance is entirely legal . It’s even quite common – something as simple as putting money into a 401(k) or an IRA is a tax avoidance strategy. Taxpayers may also legally reduce their tax liabilities by claiming deductions or credits like the earned income tax credit . Because the tax code is so complicated, especially for businesses and high-income earners with lots of investments, many taxpayers pay professional tax preparers to help them create tax plans centered around tax avoidance strategies. What is Tax Evasion? Tax evasion involves taking willful steps to avoid paying taxes that you legally owe. Evasion may take the form of not filing tax returns, not reporting all of your income, hiding income from offshore assets, claiming credits you don't qualify for, or taking other illegal actions to avoid a tax liability. Tax evasion is a type of tax fraud , and it's always criminal. In contrast, tax fraud may be either criminal or civil. Tax Avoidance vs. Tax Evasion: What is the Difference? The difference between tax evasion and tax avoidance is that evasion is illegal and avoidance is legal. To help you understand the distinction, check out the following table and then, let's look at a couple of examples. Tax Evasion Tax Avoidance Legality Illegal Legal IRS perspective Banned Encouraged Consequences Criminal charges, fines, and imprisonment Reduced tax bill Now for the examples. Say you contribute $6000 to a 401(k) or an IRA. The contribution reduces your taxable income and by extension reduces your tax liability. That is a legal tax avoidance strategy. In contrast, imagine you put $6000 in a savings account and then, you write off that amount as a tax-deductible retirement contribution on your tax return. That is not legal. That is tax evasion. Even if you're saving the money for retirement, it must be in a special type of account to give you a tax deduction. Here's another example. Say that your business buys equipment for $50,000. You can generally choose between deprecating the asset slowly over time or using a Section 179 deduction to claim the entire amount in the year of purchase. The Section 179 deduction has the power to dramatically reduce your tax bill - it's a legal tax avoidance strategy. Now, say that you buy a $50,000 car for personal use, but you write it off through your business. That is not legal. You cannot legally write off personal expenses. That is tax evasion. Note, however, that tax evasion requires willful intent - if you made a mistake, the IRS may simply adjust your return and assess a penalty rather than pursue criminal charges. Examples of Tax Avoidance There are several different ways to engage in tax avoidance. If you have a complicated tax situation, you may want to consult with a tax professional about advanced tax planning strategies that can help you legally avoid paying taxes as much as possible. A tax professional can be indispensable, especially since there's often new tax legislation and the rules change frequently. Here are some examples of tax avoidance strategies: Tax-advantaged retirement accounts - you don't have to pay income tax on income contributed to 401(k)s, IRAs, or other tax-advantaged retirement accounts, but there are limits on these contributions. Health savings accounts - you don't face income tax on income contributed to Health Savings Accounts (HSA) or Flexible Spending Accounts (FSA), but again, you must meet certain requirements and can only contribute a certain amount. Loss harvesting - if you sell investments at a loss, you may be able to offset capital gains and possibly a small amount of earned income, helping to lower your overall tax liability. Charitable donations - if you itemize deductions, you can claim a deduction for cash or assets donated to charity. Even if you don't itemize you may be able to claim a state deduction. Corporations can also claim deductions for giving to charity. Itemizing deductions - individuals can claim a standard deduction or they can itemize. If the total of your itemized deductions (medical expenses over a certain threshold, mortgage interest, state and local taxes, charitable donations, etc) is more than the standard deduction, you should carefully track all of these expenses to ensure you avoid as much tax as legally possible. 1031 exchange property - you can avoid paying tax on capital gains from real estate sales if you buy a substantially similar type of property within a strict time frame. This helps you avoid tax in the year of the exchange, but note that it only defers the gain; it doesn't eliminate the tax permanently. Municipal bonds - the interest earned from municipal bonds is tax-free, unlike the interest from most other investments. Strategic depreciation of business assets - with the right strategies, you can minimize your tax liability while growing your business. For instance, if you buy equipment using a loan, you can claim the full price of the equipment as a Section 179 deduction in the year of purchase which reduces your tax liability, but because you bought the asset using a loan, you pay for it slowly over time. That lets you enjoy the tax benefit upfront, without having to come up with all the cash to buy the asset right away. Net operating losses - if your business has a net operating loss, you can use that loss to reduce other business income or roll it forward to offset business income in future tax years. This is not an exhaustive list. There are all kinds of ways to legally reduce your tax bill, and if you own a business, you should consult with a tax planner to talk about strategies. Examples of Tax Evasion Here are some of the willful acts that may be considered tax evasion: Underreporting or not reporting income - for example, not reporting cash payments received by your business or hiding income related to foreign assets such as rental income from a property in another country or interest earned on a foreign bank account . Not reporting illegal income - by law, you are supposed to report all income, even if it was earned from illegal activities. For example, Al Capone was convicted of tax evasion for not reporting his illegal source income. Claiming credits you're not entitled to - for instance, claiming an employee retention credit when you didn't meet all of the criteria or making up fake dependents to claim a credit for other dependents. Saying you're a resident of another state to avoid taxes - setting up an address and falsely claiming that you live in a state with no income tax or low taxes is a form of tax evasion - however, this is committed against the state where you have actual residency not against the federal government. In fact, residency audits are very common in New York State for this very reason. Falsifying records to evade taxes - for instance, keeping two sets of books for your business and then if you are audited, providing the IRS with the books that show a lower tax liability. Remember, that tax evasion is always a crime, but it's not always possible for the IRS to prove that a taxpayer's actions rise to the level of tax evasion. As a result, the IRS often pursues tax fraud charges instead of tax evasion. Tax fraud can be criminal or civil. If the IRS believes that you have committed a crime, they may recommend criminal persecution, but often, they just pursue civil fraud penalties which are 75% of the underreported or underpaid tax. What Are the Consequences of Tax Evasion? According to Section 7201 of the Internal Revenue Code, the penalty for tax evasion is up to $100,000 for individuals and up to $500,000 for corporations with imprisonment of up to five years. Again tax evasion is a willful attempt to illegally avoid paying taxes. To be found guilty of tax evasion, you must have had specific intent to evade a known duty to pay tax, and you must have taken affirmative action to do so. What Should You Do If You Committed Tax Evasion? If you have willfully attempted to evade taxes, you may need to come clean through the IRS's Criminal Investigation Voluntary Disclosure Program (VDP). However, you should not use this program if you simply made a mistake - in that case, you should amend the tax returns that were filed incorrectly. To learn which option is right for your situation, contact a tax professional today. What Should You Do If You Think You Overpaid Tax? If you believe that you overpaid tax due to not claiming credits or deductions properly or due to a lack of tax planning, consider having a professional review your old tax return(s). If they see any unutilized tax avoidance strategies, they can help you amend returns. You have up to three years from the original due date to claim a refund. Are Tax Shelters Tax Avoidance or Evasion? Legal tax shelters are a form of tax avoidance. However, there are many abusive tax shelters that fall under the umbrella of tax evasion. The IRS requires taxpayers to disclose their participation in certain tax shelters on their tax returns so the agency can monitor these transactions for signs of illegality. The IRS also has a hotline taxpayers can call to report abusive tax shelters. Are Tax Loopholes Legal? Yes, tax loopholes typically refer to legal strategies that reduce your tax liability. A loophole is generally considered to be a legal exception to the rule. What Is the Underground Economy? According to the IRS, the underground economy refers to all of the income not reported to the IRS earned from both legal and illegal activities. For instance, say your legal retail business earns $300,000 in profits, but you only report $200,000. The $100,000 that you didn't report is part of the underground economy. Or say that you sell illegal drugs, you earn $20,000, and you don't report any of it, that is also part of the underground economy. Finding a Tax Relief Program That Works Even with a dedicated approach to tax avoidance, many people still wind up owing the IRS at the end of the year. Moreover, for some families, owing money to the IRS or state creates a severe burden that snowballs over the next year. There are options for people who are struggling to pay their taxes. To find the right tax relief program , a professional tax firm can help narrow down the right option for each situation.
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March 12, 2025 By: [Charles P. Corsello, EA](https://taxcure.com/professionals/charles-p-corsello/profile)\\|Reviewed by: [Kari Brummond, EA](https://taxcure.com/professionals/kari-brummond-4b0a3b32-907c-440e-9d3e-5c1f1d8521bb/profile) ![Tax Avoidance vs Tax Evasion](https://images.taxcure.com/featured_images/featured_image/41/image/Tax_Avoidance_vs._Tax_Evasion.jpg) Tax avoidance and [tax evasion](https://taxcure.com/tax-problems/tax-penalties/tax-evasion) both reduce your tax bill. But tax avoidance involves using legal strategies to reduce how much tax you owe, while tax evasion is a crime punishable by fines and possible jail time. Staying on the right side of the law requires you to understand the distinctions between these two concepts - if in doubt, use TaxCure to find a tax professional to help you. Key takeaways - Tax avoidance - reducing your tax liability through legal tax planning strategies. - Tax evasion - taking illegal actions to evade paying taxes. - Examples of tax avoidance - using tax-advantaged retirement accounts or strategically claiming business tax deductions. - Examples of tax evasion - not reporting income or falsely claiming credits or deductions. - Consequences of tax avoidance - a legally earned, lower tax bill. - Consequences of tax evasion - the risk of facing legal charges, fines, and imprisonment. ## What is Tax Avoidance? Tax avoidance is entirely legal. It’s even quite common – something as simple as putting money into a 401(k) or an IRA is a tax avoidance strategy. Taxpayers may also legally reduce their tax liabilities by claiming deductions or credits like the [earned income tax credit](https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/do-i-qualify-for-earned-income-tax-credit-eitc). Because the tax code is so complicated, especially for businesses and high-income earners with lots of investments, many taxpayers pay professional tax preparers to help them create tax plans centered around tax avoidance strategies. ## What is Tax Evasion? Tax evasion involves taking willful steps to avoid paying taxes that you legally owe. Evasion may take the form of not filing tax returns, not reporting all of your income, hiding income from offshore assets, claiming credits you don't qualify for, or taking other illegal actions to avoid a tax liability. Tax evasion is a type of [tax fraud](https://taxcure.com/tax-problems/tax-penalties/tax-fraud-penalties), and it's always criminal. In contrast, tax fraud may be either criminal or civil. ## Tax Avoidance vs. Tax Evasion: What is the Difference? The difference between tax evasion and tax avoidance is that evasion is illegal and avoidance is legal. To help you understand the distinction, check out the following table and then, let's look at a couple of examples. \| \| \| \| \|---\|---\|---\| \| \| Tax Evasion \| Tax Avoidance \| \| Legality \| Illegal \| Legal \| \| IRS perspective \| Banned \| Encouraged \| \| Consequences \| Criminal charges, fines, and imprisonment \| Reduced tax bill \| Now for the examples. Say you contribute \$6000 to a 401(k) or an IRA. The contribution reduces your taxable income and by extension reduces your tax liability. That is a legal tax avoidance strategy. In contrast, imagine you put \$6000 in a savings account and then, you write off that amount as a tax-deductible retirement contribution on your tax return. That is not legal. That is tax evasion. Even if you're saving the money for retirement, it must be in a special type of account to give you a tax deduction. Here's another example. Say that your business buys equipment for \$50,000. You can generally choose between deprecating the asset slowly over time or using a Section 179 deduction to claim the entire amount in the year of purchase. The Section 179 deduction has the power to dramatically reduce your tax bill - it's a legal tax avoidance strategy. Now, say that you buy a \$50,000 car for personal use, but you write it off through your business. That is not legal. You cannot legally write off personal expenses. That is tax evasion. Note, however, that tax evasion requires willful intent - if you made a mistake, the IRS may simply adjust your return and assess a penalty rather than pursue criminal charges. ## Examples of Tax Avoidance There are several different ways to engage in tax avoidance. If you have a complicated tax situation, you may want to consult with a tax professional about advanced tax planning strategies that can help you legally avoid paying taxes as much as possible. A tax professional can be indispensable, especially since there's often [new tax legislation](https://taxcure.com/blog/new-tax-legislation) and the rules change frequently. Here are some examples of tax avoidance strategies: - Tax-advantaged retirement accounts \- you don't have to pay income tax on income contributed to 401(k)s, IRAs, or other tax-advantaged retirement accounts, but there are limits on these contributions. - Health savings accounts - you don't face income tax on income contributed to Health Savings Accounts (HSA) or Flexible Spending Accounts (FSA), but again, you must meet certain requirements and can only contribute a certain amount. - Loss harvesting - if you sell investments at a loss, you may be able to offset capital gains and possibly a small amount of earned income, helping to lower your overall tax liability. - Charitable donations - if you itemize deductions, you can claim a deduction for cash or assets donated to charity. Even if you don't itemize you may be able to claim a state deduction. Corporations can also claim deductions for giving to charity. - Itemizing deductions - individuals can claim a standard deduction or they can itemize. If the total of your itemized deductions (medical expenses over a certain threshold, mortgage interest, state and local taxes, charitable donations, etc) is more than the standard deduction, you should carefully track all of these expenses to ensure you avoid as much tax as legally possible. - 1031 exchange property - you can avoid paying tax on capital gains from real estate sales if you buy a substantially similar type of property within a strict time frame. This helps you avoid tax in the year of the exchange, but note that it only defers the gain; it doesn't eliminate the tax permanently. - Municipal bonds - the interest earned from municipal bonds is tax-free, unlike the interest from most other investments. - Strategic depreciation of business assets - with the right strategies, you can minimize your tax liability while growing your business. For instance, if you buy equipment using a loan, you can claim the full price of the equipment as a Section 179 deduction in the year of purchase which reduces your tax liability, but because you bought the asset using a loan, you pay for it slowly over time. That lets you enjoy the tax benefit upfront, without having to come up with all the cash to buy the asset right away. - Net operating losses - if your business has a net operating loss, you can use that loss to reduce other business income or roll it forward to offset business income in future tax years. This is not an exhaustive list. There are all kinds of ways to legally reduce your tax bill, and if you own a business, you should consult with a tax planner to talk about strategies. ## Examples of Tax Evasion Here are some of the willful acts that may be considered tax evasion: - Underreporting or not reporting income - for example, not reporting cash payments received by your business or hiding income related to foreign assets such as rental income from a property in another country or interest earned on a [foreign bank account](https://taxcure.com/tax-problems/fbar). - Not reporting illegal income \- by law, you are supposed to report all income, even if it was earned from illegal activities. For example, Al Capone was convicted of tax evasion for not reporting his illegal source income. - Claiming credits you're not entitled to - for instance, claiming an [employee retention credit](https://taxcure.com/tax-problems/tax-audit/erc-audit) when you didn't meet all of the criteria or making up fake dependents to claim a credit for other dependents. - Saying you're a resident of another state to avoid taxes - setting up an address and falsely claiming that you live in a state with no income tax or low taxes is a form of tax evasion - however, this is committed against the state where you have actual residency not against the federal government. In fact, [residency audits](https://taxcure.com/state-taxes/new-york/residency-audit) are very common in New York State for this very reason. - Falsifying records to evade taxes \- for instance, keeping two sets of books for your business and then if you are audited, providing the IRS with the books that show a lower tax liability. Remember, that tax evasion is always a crime, but it's not always possible for the IRS to prove that a taxpayer's actions rise to the level of tax evasion. As a result, the IRS often pursues tax fraud charges instead of tax evasion. Tax fraud can be criminal or civil. If the IRS believes that you have committed a crime, they may recommend criminal persecution, but often, they just pursue civil fraud penalties which are 75% of the underreported or underpaid tax. ## What Are the Consequences of Tax Evasion? According to Section 7201 of the Internal Revenue Code, the penalty for tax evasion is up to \$100,000 for individuals and up to \$500,000 for corporations with imprisonment of up to five years. Again tax evasion is a willful attempt to illegally avoid paying taxes. To be found guilty of tax evasion, you must have had specific intent to evade a known duty to pay tax, and you must have taken affirmative action to do so. ## What Should You Do If You Committed Tax Evasion? If you have willfully attempted to evade taxes, you may need to come clean through the IRS's Criminal Investigation [Voluntary Disclosure Program](https://taxcure.com/tax-solutions/criminal-voluntary-disclosure) (VDP). However, you should not use this program if you simply [made a mistake](https://taxcure.com/tax-problems/mistake-tax-return) - in that case, you should [amend the tax returns](https://taxcure.com/tax-filings/amend-tax-return) that were filed incorrectly. To learn which option is right for your situation, contact a tax professional today. ## What Should You Do If You Think You Overpaid Tax? If you believe that you overpaid tax due to not claiming credits or deductions properly or due to a lack of tax planning, consider having a professional review your old tax return(s). If they see any unutilized tax avoidance strategies, they can help you amend returns. You have up to three years from the original due date to claim a refund. ## Are Tax Shelters Tax Avoidance or Evasion? Legal tax shelters are a form of tax avoidance. However, there are many abusive tax shelters that fall under the umbrella of tax evasion. The IRS requires taxpayers to disclose their participation in certain tax shelters on their tax returns so the agency can monitor these transactions for signs of illegality. The IRS also has a hotline taxpayers can call to report abusive tax shelters. ## Are Tax Loopholes Legal? Yes, tax loopholes typically refer to legal strategies that reduce your tax liability. A loophole is generally considered to be a legal exception to the rule. ## What Is the Underground Economy? According to the IRS, the underground economy refers to all of the income not reported to the IRS earned from both legal and illegal activities. For instance, say your legal retail business earns \$300,000 in profits, but you only report \$200,000. The \$100,000 that you didn't report is part of the underground economy. Or say that you sell illegal drugs, you earn \$20,000, and you don't report any of it, that is also part of the underground economy. ## Finding a Tax Relief Program That Works Even with a dedicated approach to tax avoidance, many people still wind up owing the IRS at the end of the year. Moreover, for some families, owing money to the IRS or state creates a severe burden that snowballs over the next year. There are options for people who are struggling to pay their taxes. To find the right [tax relief program](https://taxcure.com/tax-professional/worst-tax-relief-companies), a professional tax firm can help narrow down the right option for each situation. Local Tax Problem Professionals Harry Hearn CPA at Harry C. Hearn, Inc. ![Harry Hearn headshot](https://images.taxcure.com/uploads/user/avatar/816/thumb_thumb_1608313712448.webp) Serving Nationwide Columbia, Maryland [View Profile](https://taxcure.com/professionals/harry-hearn/profile) ![mail](https://taxcure.com/assets/images/noun_Mail_748976@2x.png)Message ![Taxcure Phone](https://taxcure.com/assets/images/noun_Phone_3324301-2@2x.png)Call Harry Grace Castro, EA, CAA EA at Midland LDU Insurance & Tax Services ![Grace Castro, EA, CAA headshot](https://images.taxcure.com/uploads/user/avatar/1393/thumb_grace.webp) Serving Nationwide Franklin Park, Illinois ![TaxCure](https://taxcure.com/assets/icons/favicon/normal/favicon.ico) 5\.0 6 reviews ![Google](https://taxcure.com/assets/icons/google.svg) 5\.0 67 reviews [View Profile](https://taxcure.com/professionals/grace-castro-ea/profile) ![mail](https://taxcure.com/assets/images/noun_Mail_748976@2x.png)Message ![Taxcure Phone](https://taxcure.com/assets/images/noun_Phone_3324301-2@2x.png)Call Grace Anna Mace EA at AM Tax Defense ![Anna Mace headshot](https://images.taxcure.com/uploads/user/avatar/1733/thumb_my_photo.webp) Serving Nationwide Miami, Florida ![TaxCure](https://taxcure.com/assets/icons/favicon/normal/favicon.ico) 5\.0 6 reviews [View Profile](https://taxcure.com/professionals/anna-mace/profile) ![mail](https://taxcure.com/assets/images/noun_Mail_748976@2x.png)Message ![Taxcure Phone](https://taxcure.com/assets/images/noun_Phone_3324301-2@2x.png)Call Anna Steven Litteer EA at McLaud Law P.C. ![Steven Litteer headshot](https://images.taxcure.com/uploads/user/avatar/903/thumb_thumb_Steve_at_Desk_Close_up.webp) Serving Nationwide Rochester, New York ![TaxCure](https://taxcure.com/assets/icons/favicon/normal/favicon.ico) 5\.0 10 reviews ![Google](https://taxcure.com/assets/icons/google.svg) 4\.8 48 reviews [View Profile](https://taxcure.com/professionals/steven-litteer/profile) ![mail](https://taxcure.com/assets/images/noun_Mail_748976@2x.png)Message ![Taxcure Phone](https://taxcure.com/assets/images/noun_Phone_3324301-2@2x.png)Call Steven Timothy S. 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Readable Markdown	Tax avoidance and [tax evasion](https://taxcure.com/tax-problems/tax-penalties/tax-evasion) both reduce your tax bill. But tax avoidance involves using legal strategies to reduce how much tax you owe, while tax evasion is a crime punishable by fines and possible jail time. Staying on the right side of the law requires you to understand the distinctions between these two concepts - if in doubt, use TaxCure to find a tax professional to help you. Key takeaways - Tax avoidance - reducing your tax liability through legal tax planning strategies. - Tax evasion - taking illegal actions to evade paying taxes. - Examples of tax avoidance - using tax-advantaged retirement accounts or strategically claiming business tax deductions. - Examples of tax evasion - not reporting income or falsely claiming credits or deductions. - Consequences of tax avoidance - a legally earned, lower tax bill. - Consequences of tax evasion - the risk of facing legal charges, fines, and imprisonment. ## What is Tax Avoidance? Tax avoidance is entirely legal. It’s even quite common – something as simple as putting money into a 401(k) or an IRA is a tax avoidance strategy. Taxpayers may also legally reduce their tax liabilities by claiming deductions or credits like the [earned income tax credit](https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/do-i-qualify-for-earned-income-tax-credit-eitc). Because the tax code is so complicated, especially for businesses and high-income earners with lots of investments, many taxpayers pay professional tax preparers to help them create tax plans centered around tax avoidance strategies. ## What is Tax Evasion? Tax evasion involves taking willful steps to avoid paying taxes that you legally owe. Evasion may take the form of not filing tax returns, not reporting all of your income, hiding income from offshore assets, claiming credits you don't qualify for, or taking other illegal actions to avoid a tax liability. Tax evasion is a type of [tax fraud](https://taxcure.com/tax-problems/tax-penalties/tax-fraud-penalties), and it's always criminal. In contrast, tax fraud may be either criminal or civil. ## Tax Avoidance vs. Tax Evasion: What is the Difference? The difference between tax evasion and tax avoidance is that evasion is illegal and avoidance is legal. To help you understand the distinction, check out the following table and then, let's look at a couple of examples. \| \| \| \| \|---\|---\|---\| \| \| Tax Evasion \| Tax Avoidance \| \| Legality \| Illegal \| Legal \| \| IRS perspective \| Banned \| Encouraged \| \| Consequences \| Criminal charges, fines, and imprisonment \| Reduced tax bill \| Now for the examples. Say you contribute \$6000 to a 401(k) or an IRA. The contribution reduces your taxable income and by extension reduces your tax liability. That is a legal tax avoidance strategy. In contrast, imagine you put \$6000 in a savings account and then, you write off that amount as a tax-deductible retirement contribution on your tax return. That is not legal. That is tax evasion. Even if you're saving the money for retirement, it must be in a special type of account to give you a tax deduction. Here's another example. Say that your business buys equipment for \$50,000. You can generally choose between deprecating the asset slowly over time or using a Section 179 deduction to claim the entire amount in the year of purchase. The Section 179 deduction has the power to dramatically reduce your tax bill - it's a legal tax avoidance strategy. Now, say that you buy a \$50,000 car for personal use, but you write it off through your business. That is not legal. You cannot legally write off personal expenses. That is tax evasion. Note, however, that tax evasion requires willful intent - if you made a mistake, the IRS may simply adjust your return and assess a penalty rather than pursue criminal charges. ## Examples of Tax Avoidance There are several different ways to engage in tax avoidance. If you have a complicated tax situation, you may want to consult with a tax professional about advanced tax planning strategies that can help you legally avoid paying taxes as much as possible. A tax professional can be indispensable, especially since there's often [new tax legislation](https://taxcure.com/blog/new-tax-legislation) and the rules change frequently. Here are some examples of tax avoidance strategies: - Tax-advantaged retirement accounts \- you don't have to pay income tax on income contributed to 401(k)s, IRAs, or other tax-advantaged retirement accounts, but there are limits on these contributions. - Health savings accounts - you don't face income tax on income contributed to Health Savings Accounts (HSA) or Flexible Spending Accounts (FSA), but again, you must meet certain requirements and can only contribute a certain amount. - Loss harvesting - if you sell investments at a loss, you may be able to offset capital gains and possibly a small amount of earned income, helping to lower your overall tax liability. - Charitable donations - if you itemize deductions, you can claim a deduction for cash or assets donated to charity. Even if you don't itemize you may be able to claim a state deduction. Corporations can also claim deductions for giving to charity. - Itemizing deductions - individuals can claim a standard deduction or they can itemize. If the total of your itemized deductions (medical expenses over a certain threshold, mortgage interest, state and local taxes, charitable donations, etc) is more than the standard deduction, you should carefully track all of these expenses to ensure you avoid as much tax as legally possible. - 1031 exchange property - you can avoid paying tax on capital gains from real estate sales if you buy a substantially similar type of property within a strict time frame. This helps you avoid tax in the year of the exchange, but note that it only defers the gain; it doesn't eliminate the tax permanently. - Municipal bonds - the interest earned from municipal bonds is tax-free, unlike the interest from most other investments. - Strategic depreciation of business assets - with the right strategies, you can minimize your tax liability while growing your business. For instance, if you buy equipment using a loan, you can claim the full price of the equipment as a Section 179 deduction in the year of purchase which reduces your tax liability, but because you bought the asset using a loan, you pay for it slowly over time. That lets you enjoy the tax benefit upfront, without having to come up with all the cash to buy the asset right away. - Net operating losses - if your business has a net operating loss, you can use that loss to reduce other business income or roll it forward to offset business income in future tax years. This is not an exhaustive list. There are all kinds of ways to legally reduce your tax bill, and if you own a business, you should consult with a tax planner to talk about strategies. ## Examples of Tax Evasion Here are some of the willful acts that may be considered tax evasion: - Underreporting or not reporting income - for example, not reporting cash payments received by your business or hiding income related to foreign assets such as rental income from a property in another country or interest earned on a [foreign bank account](https://taxcure.com/tax-problems/fbar). - Not reporting illegal income \- by law, you are supposed to report all income, even if it was earned from illegal activities. For example, Al Capone was convicted of tax evasion for not reporting his illegal source income. - Claiming credits you're not entitled to - for instance, claiming an [employee retention credit](https://taxcure.com/tax-problems/tax-audit/erc-audit) when you didn't meet all of the criteria or making up fake dependents to claim a credit for other dependents. - Saying you're a resident of another state to avoid taxes - setting up an address and falsely claiming that you live in a state with no income tax or low taxes is a form of tax evasion - however, this is committed against the state where you have actual residency not against the federal government. In fact, [residency audits](https://taxcure.com/state-taxes/new-york/residency-audit) are very common in New York State for this very reason. - Falsifying records to evade taxes \- for instance, keeping two sets of books for your business and then if you are audited, providing the IRS with the books that show a lower tax liability. Remember, that tax evasion is always a crime, but it's not always possible for the IRS to prove that a taxpayer's actions rise to the level of tax evasion. As a result, the IRS often pursues tax fraud charges instead of tax evasion. Tax fraud can be criminal or civil. If the IRS believes that you have committed a crime, they may recommend criminal persecution, but often, they just pursue civil fraud penalties which are 75% of the underreported or underpaid tax. ## What Are the Consequences of Tax Evasion? According to Section 7201 of the Internal Revenue Code, the penalty for tax evasion is up to \$100,000 for individuals and up to \$500,000 for corporations with imprisonment of up to five years. Again tax evasion is a willful attempt to illegally avoid paying taxes. To be found guilty of tax evasion, you must have had specific intent to evade a known duty to pay tax, and you must have taken affirmative action to do so. ## What Should You Do If You Committed Tax Evasion? If you have willfully attempted to evade taxes, you may need to come clean through the IRS's Criminal Investigation [Voluntary Disclosure Program](https://taxcure.com/tax-solutions/criminal-voluntary-disclosure) (VDP). However, you should not use this program if you simply [made a mistake](https://taxcure.com/tax-problems/mistake-tax-return) - in that case, you should [amend the tax returns](https://taxcure.com/tax-filings/amend-tax-return) that were filed incorrectly. To learn which option is right for your situation, contact a tax professional today. ## What Should You Do If You Think You Overpaid Tax? If you believe that you overpaid tax due to not claiming credits or deductions properly or due to a lack of tax planning, consider having a professional review your old tax return(s). If they see any unutilized tax avoidance strategies, they can help you amend returns. You have up to three years from the original due date to claim a refund. ## Are Tax Shelters Tax Avoidance or Evasion? Legal tax shelters are a form of tax avoidance. However, there are many abusive tax shelters that fall under the umbrella of tax evasion. The IRS requires taxpayers to disclose their participation in certain tax shelters on their tax returns so the agency can monitor these transactions for signs of illegality. The IRS also has a hotline taxpayers can call to report abusive tax shelters. ## Are Tax Loopholes Legal? Yes, tax loopholes typically refer to legal strategies that reduce your tax liability. A loophole is generally considered to be a legal exception to the rule. ## What Is the Underground Economy? According to the IRS, the underground economy refers to all of the income not reported to the IRS earned from both legal and illegal activities. For instance, say your legal retail business earns \$300,000 in profits, but you only report \$200,000. The \$100,000 that you didn't report is part of the underground economy. Or say that you sell illegal drugs, you earn \$20,000, and you don't report any of it, that is also part of the underground economy. ## Finding a Tax Relief Program That Works Even with a dedicated approach to tax avoidance, many people still wind up owing the IRS at the end of the year. Moreover, for some families, owing money to the IRS or state creates a severe burden that snowballs over the next year. There are options for people who are struggling to pay their taxes. To find the right [tax relief program](https://taxcure.com/tax-professional/worst-tax-relief-companies), a professional tax firm can help narrow down the right option for each situation.
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