The 2025 tax season has already begun, and millions of individual and business taxpayers will soon file their returns, hoping to owe as little as possible.
Unfortunately, this can be a stressful time for those who want to get things right. After all, there’s a price for reporting wrong information (intentional or inadvertent) to pay fewer taxes.
Of course, the goal is to reduce your tax liability to the lowest amount legally possible, but where do we draw the line between tax avoidance and tax fraud? The quick story is that one is perfectly legal, and the other is actually illegal. Keep reading to learn more about the difference.
Tax Avoidance vs. Tax Fraud: What’s the Difference?
“Tax avoidance is using lawful tax strategies to reduce tax liability, while tax fraud is deliberately evading taxes or falsifying tax documents to deceive tax authorities,” says Kevin Knull, certified financial planner and CEO of TaxStatus.
Tax avoidance may involve strategies like claiming deductions, credits or tax exemptions allowed by IRS rules. Contributing to a retirement account or deducting business expenses are common forms of reducing or deferring taxes.
On the other hand, tax fraud is illegal and happens when someone deliberately lies or hides information to avoid paying taxes. This could include activities like not reporting all of your income or falsifying records.
While tax avoidance works within the rules, tax fraud breaks them and can lead to serious consequences, like fines, tax levies or even jail time. The key is to stay informed about what the IRS allows while being truthful and accurate on your return.
Common Tax Avoidance Strategies
There are plenty of ways to reduce your tax obligations within the tax code. Often called loopholes, these tax strategies may be more accessible than you think:
— Deductions: Reduce taxable income by claiming expenses like mortgage interest, student loan interest or medical expenses.
— Tax Credits: Directly lower taxes owed, including options like the child tax credit or education credits for tuition.
— Legal Loopholes: Use methods like tax deferment through retirement accounts such as a 401(k) or IRA.
— Business Strategies: Deduct expenses like home office costs or asset depreciation.
Understanding Tax Fraud
Tax fraud occurs when you intentionally lie or provide false information on your tax return to avoid paying the correct amount of taxes.
This could include not reporting all your income, claiming deductions or credits you’re not eligible for, or hiding money in secret accounts. Another example is claiming false deductions or inflating expenses to reduce taxable income, which can lead to significant underpayment of taxes owed.
Other forms of tax fraud include tax shelters and offshore accounts used to hide assets or income from the IRS. While these might seem like appealing ways to avoid taxes, they may cost way more in the form of penalties and fines down the road.
[Read: 22 Legal Secrets to Help Reduce Your Taxes]
Report All Income
A common way of committing tax fraud is receiving payments in cash and failing to report them as income. For example, self-employed individuals or small business owners who deal primarily in cash might be tempted to omit earnings from their reported income to lower their tax liability.
Sometimes, people don’t report income gained through illegal activities such as gambling and selling stolen goods. (Though the best approach here is probably not to engage in these activities in the first place. )
Other times, they don’t report all the tips they collect or the money they earn through legal activities such as garage sales, babysitting, tutoring or yard work.
Whether these omissions are inadvertent or intentional, the results can be severe. Failure to report all income can lead to audits, penalties and fines, not to mention the potential for criminal charges if the IRS determines the omission was intentional.
The IRS has access to various tools and data to cross-check reported income, making it difficult for you to hide earnings. So, it’s best to be truthful because the IRS will find out.
Don’t Claim Incorrect Credit and Deductions
When you sign your tax return, you certify that all the information on it is true and accurate to the best of your knowledge and under the penalty of perjury. This means providing false information is punishable by law.
Claiming credits or deductions you are not entitled to is another form of tax fraud that can lead to serious consequences. Examples of this include claiming a child as a dependent when the child doesn’t qualify under IRS rules or inflating charitable giving amounts.
To stay on the right side of the law, maintain proper documentation related to your returns (for a minimum of seven years) and be ready to furnish it to the IRS upon demand. Keep things like receipts or proof of eligibility to support all claims made in your income tax filing.
[Trump Has Promised to Lower Taxes: Will It Actually Make You More Money?]
Get Professional Help
Depending on the complexity of your financial situation and your understanding of tax laws, you may want to engage the help of a professional. Yes, it will cost extra money, but this money could save you in the long run from fines and penalties should you inadvertently step into the realm of illegal tax evasion.
A tax professional can ensure that all deductions and credits are applied correctly, maximizing your potential refund while staying compliant with the law. They can also spot errors or inconsistencies in your return that you might overlook, reducing the risk of triggering an IRS audit.
Finally, tax professionals stay up-to-date on changes to tax laws and regulations, which can help you avoid mistakes that could be classified as fraud.
[How to Find a Reputable Tax Preparer Near You]
File Timely and Accurately
One simple way to avoid trouble with the IRS is to ensure your tax filings are timely and accurate. Missing deadlines or making mistakes on your return can result in penalties, even if fraud isn’t involved. Many tax software programs help streamline this process, but if your financial situation is complex, consider working with a tax professional to ensure full compliance.
Lastly, filing on time helps avoid late-payment penalties and ensures you remain in good standing with the IRS and other applicable tax authorities. If you can’t meet the filing deadline, consider filing an extension, which gives you more time to prepare and submit your income tax return without facing penalties.
However, remember that filing an extension doesn’t delay the due date for paying any taxes owed. You must still estimate your tax liability and pay it by the regular deadline to avoid interest and late payment penalties.
Staying ‘In the Know’ About Tax Laws
Tax laws are constantly changing, and staying informed helps you avoid errors that could lead to fines or fraud allegations. The IRS regularly updates rules and regulations, which can impact deductions, credits and filing procedures.
Not knowing or understanding changes is not an acceptable excuse for filing incorrectly. So, please take the time to review tax code updates each year to make sure you’re in compliance.
If it’s too confusing, consult with a tax professional, review online resources or attend educational workshops and webinars on tax preparation. Keeping yourself informed can keep you on the right side of the law while taking advantage of any new deductions or credits.
Staying informed also helps you understand your rights and responsibilities as a taxpayer, which empowers you to make informed financial decisions and avoid costly mistakes.
Taking the time to understand your tax obligations and ensuring full compliance with IRS rules will save you from unnecessary stress, fines or legal issues down the road.
Understanding the difference between legal tax strategies and illegal actions is critical for staying compliant and avoiding penalties. Always seek professional advice if you’re uncertain about your tax situation to ensure you remain firmly within the bounds of the law.
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Tax Avoidance vs. Tax Fraud originally appeared on usnews.com
