Tax Avoidance vs. Tax Evasion: What’s the Difference?

Mar 10th 2016
Share this content
1040 form
iStock_Pali Rao_1040 form

Is there a difference between tax avoidance and tax evasion? Sure there is, but the difference is not academic.

Whereas evasion is a criminal offense, avoidance is perfectly legal, as I have repeatedly pointed out in most of the more than 100 articles that I have written for AccountingWEB.

Delve, Dear Reader, into the archive of my articles. Read them to learn more than you will ever want to know, as Garrison Keillor would say, about how to select and implement safe and sensible strategies that eliminate, reduce, or postpone the amount that goes to the IRS.

For the gold-standard justification of tax avoidance, let us go back to 1947. That was when avoidance received these often-quoted words of approval from Judge Learned Hand of the 2nd Circuit Court of Appeals in New York, who is renowned for having served longer – and perhaps with more distinction – than any other federal judge in history:

“Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor; and all do right; for nobody owes any public duty to pay more than the law demands; taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

Consistent with Judge Hand’s reasoning, US Supreme Court Justice George Sutherland commented that, “The legal right of a taxpayer to decrease his taxes or to altogether avoid them by means which the law permits cannot be doubted.

AccountingWEB’s archive of my articles also includes several on how the law authorizes the IRS to make life decidedly disagreeable for people who intentionally attempt to evade income taxes.

Code Section 7201 makes evasion a felony, the punishment for which is a fine of as much as $100,000 and a jail sentence of up to five years, or both, plus prosecution costs. Sentences and fines, by the way, are in addition to the sizable civil penalties for fraud, plus back taxes and interest, routinely exacted by the IRS from cheaters who are spared criminal prosecutions.

Here are some words to the wise from a book, CriminalTaxFraud: RepresentingtheTaxpayerBeforeTrial, published by the Practicing Law Institute:

“It is surprising how many ‘witnesses’ or ‘observers’ a taxpayer can create in the process of understating his taxes. A man's mistress can observe that he always pays cash when with her. An estranged wife might have a very good idea of who is being entertained on the ‘business trip’ to Miami. Any bookkeeper told not to record certain payments may be your bookkeeper for life. And it is very difficult to fire an insurance broker who has been giving you kickbacks for years.”

Replies (1)

Please login or register to join the discussion.

By Clinton Lee
Apr 7th 2016 14:49

To the wife, the mistress, the book-keeper and broker ... add lawyer as we've seen with the Mossack Fonseca Panama leak papers over the last few days.

Thanks (0)