Don't Evade, Avoid - Knowing the Difference Will Keep You Out of Jail.
As we are close to the final weeks in tax season, it’s time to discuss something that can be tricky, yet serious: Tax avoidance and tax evasion. Hint: one is good and we encourage it; the other is really bad and it can land you in jail.
When you think about the words “evade” and “avoid” you would imagine that avoiding something is worse than evading something. Superheroes evade bullets, while people tend to avoid responsibilities like taking out the trash. When it comes to taxes, though, the opposite is true.
Criminals in jail evade them, while smart, successful and completely honest business people avoid them. There’s your definition of those two terms in a nutshell:
Tax avoidance is completely legal while tax evasion is punishable by law.
A good tax planner will work with a CPA to find ways to avoid taxes. This is completely legally sanctioned. In fact, tax code is full of ways for you to reduce your taxes as a small business and even ways for you to avoid certain taxes altogether.
It’s rooted in positive reinforcement. Just like your parents might have given you a new toy or a piece of candy for behaving well, Uncle Sam will lower your taxes for doing things he likes. An easy example are tax credits. You buy a certain type of product, or make your small business compliant with a certain standard, and bam! You’ve got yourself a little tax discount coupon.
A little trickier element in tax avoidance would be taking advantage of tax loopholes. Definitely make sure you have yourself a good CPA for this one. Technically, tax loopholes are technicalities in the tax code that allow you to avoid a tax without finding yourself in violation of tax code.
There are two main types of tax loopholes - intentional ones, essentially written into tax code, and unintentional ones. Obviously, the unintentional ones are the trickier ones to adhere to and you’ll need a smart CPA to make sure you’re taking advantage of a loophole and just not outright violating tax law.
Tax evasion, on the other hand, is pretty clear. Tax evasion is when you don’t pay taxes you’re supposed to pay. You can do this a few ways, the most common being by lying on your return, whether by omission or by misrepresentation. There’s not much more to say than that.
So how do you stay on the straight-and-narrow? Get a good CPA. He/She will help you navigate the wild world of loopholes and credits, so you don’t have to worry. And maybe read up on some of this stuff on your own so you can be informed. Hey, we’d read a book if it meant staying out of jail.