The Internal Revenue Service (IRS) is one agency that no one in South Carolina or another state ever wants to hear from. The mere thought of getting a letter from the IRS makes most people nervous. If you file your taxes correctly and on time, odds are that you won’t hear from them. But sometimes people purposely omit key information or misstate their earnings. Actions like those can land you in hot water.
There’s a key point you need to be aware of. A crucial difference exists between tax evasion and tax avoidance that’s important to understand. Whether you own or manage a business, are in charge of its financial affairs or are simply paying your own individual taxes, knowing this distinction is helpful.
Which one is legal and which is not?
People sometimes use the terms tax avoidance and tax evasion loosely, but they refer to distinctly different things.
- Tax avoidance is legal and legitimate. It is the practice of reducing taxes by using deductions, tax credits and other approved methods that are described in the state tax codes or the IRS tax code. It’s a way to limit the amount of taxes you need to pay. You are not doing anything wrong.
- Tax evasion, however, is something else entirely. As explained on the website The Balance Small Business, it “is using illegal means to avoid paying taxes” such as deliberately failing to report all your income. Tax evasion comes under the category of tax fraud. The penalties can include fines or imprisonment.
Another thing to remember — tax loopholes and tax shields are means of tax avoidance and are both legal. They are both valid ways to cut down on the taxes you have to pay.
It is certainly possible to make an error when you fill out your income taxes. If that is the case, the IRS will most likely impose interest and penalties if you underpaid what you owe.
Tax issues can be complicated. Get reputable assistance if you have questions.