There is a difference between the terms, “tax evasion” and “tax avoidance.” Tax avoidance refers to the legal use of tax laws in order to lower the amount of taxes a person or corporation must pay to the government.Tax mitigation is another way to express the legal use of tax regulations in order to lower tax liability.Of course, tax avoidance and tax mitigation are legal and acceptable ways of reducing the taxes owed by an individual or corporation.

On the other hand, tax evasion generally refers to illegal efforts to avoid paying taxes.Individual taxpayers, corporations, trusts or other entities may attempt to evade paying taxes by dishonest means, including declaring less income, profits or gains than they actually earned or by inflating deductions.

In the United States, tax evasion specifically refers to not paying a tax that is already legally owed at the time of the criminal conduct.The illegal activity does not change the amount of tax owed (although substantial monetary penalties may be imposed).However, the purpose of tax avoidance is to legally avoid the creation of a tax liability in the first place.Therefore, an evaded tax is one that is still owed, while an avoided tax is one that never existed in the first place.

Example:

Taxpayer A claims more in charitable deductions than he actually donated in an effort to reduce his tax liability.In this case, the tax is legally due, so Taxpayer A has engaged in tax evasion, which is illegal.

Taxpayer B consults a tax advisor and learns that he can make a last-minute contribution to his IRA in order to reduce his tax liability.In this case, Taxpayer B legally owes less in taxes than he would have without the contribution, so he has engaged in tax avoidance, which is legal.