The Thin Line between tax Avoidance and tax Evasion

All Santa Clara taxpayer will try to do his/her best to ensure that the taxes paid are minimal. In order to do so, you may have to do a lot of tax planning and preparation. Your tax preparation services will also come in very handy. However, in this process of tax avoidance, you should not end up with tax evasion because that will land you in trouble. Confused?

Well, most people are!

Tax Avoidance by definition is the practice of doing everything possible, within the confines of the legal limits to reduce the amount of tax that is to be paid. Tax Evasion on the other hand is an act by an individual or company that will help them with reducing or avoiding taxes altogether; however, this act might not be legally acceptable. So, while tax avoidance is a smart way of doing things, tax evasion is being “too smart” while trying to do things illegally, which could lead to your imprisonment.

Now, there is a thin line between the two and a better understanding will always be beneficial for you as a taxpayer. It will help to ensure that you are on the right side of the law and it will also help you plan your taxes better.

For instance, if you make a charitable donation, which you get a tax exemption for a certain amount; you fall under the tax avoidance category as you are legally entitled to reduce the exempted amount from your taxes. However, when you receive some income that you do not reflect on your assets and hence, do not pay taxes on it, you fall under the tax evasion category as, if reflected; you will be liable to pay an income tax on the amount.

While the above mentioned example shows complete evasion of tax on income accrued, there are also instances wherein the asset value shown is significantly reduced so as to pay lesser taxes. Even in such instances, the law is broken and the person is liable for punishment as per the taxation laws.

Unfortunately, there is no set of rules that can define whether an instance would be tax avoidance or tax evasion; hence, there are people who feel that it is a loop hole to be exploited. Both activities happen for almost all kinds of taxes; whether, its income tax or VAT or import taxes, there are people who avoid taxes or evade them. Hence, in most cases of discrepancy there is a thorough audit to find out whether the person has tried to cheat the system illegally or just followed a different legal path and exercise his/her right to getting certain tax exemptions.

Why tax evasion is a serious offence?

Many people do not realize the importance of paying taxes. It is the biggest source of income for the government. It helps them plan budgets for various needs that the country would have year round. You can see infrastructural developments, health centers, schools and others being developed and all this is a result of the taxes you pay. Also, the government levies taxes from people who have a certain income so that the lower income groups can also be supported.

When you evade taxes, you are essentially robbing other people of the right to a certain facility that they can be entitled to. Also, if this is done as a business, you are being unfair to the competition that is actually paying taxes and hence, by avoiding these taxes, you are trying to increase profitability and beat competition.

The implications of the taxes being evaded are serious on an economy and on the society on a larger scale. For this very reason, tax evasion is considered to be a serious offence. When tax is evaded, you are morally and legally on very shaky grounds.

Don’t think of tax evasion, plan tax avoidance

With so much information at your disposal, you should start discussing with your Santa Clara tax preparer different ways how you can avoid taxes by planning and preparing taxes correctly. Be sure that you can tell your tax preparer about your current situation and as a Santa Clara taxpayer, the kind of exemptions that you are entitled. By doing this, he/she will tell you about the dos and the don’ts, so that you can remain within the legal limits and at the same time save on your taxes.

This is the very reason why most people will tell you to hire a reliable and experienced tax preparation service such as Bhatia & CO, INC, CPAs.