Difference between Tax Avoidance and Tax Evasion

Tax avoidance is when you reduce your taxes legally through sound tax planning.

Tax evasion is when you reduce your taxes by breaking the law.  

Judge Learned Hand famously said “there is nothing sinister” in trying to keep your taxes low.  

Nobody is obligated to pay any more tax than what is legally due.  

Thus, if you avoid paying tax because you did a 1031 exchange, or you received interest from tax-exempt municipal bonds, or you received a work opportunity tax credit for hiring a qualified veteran, that’s just good tax planning.  

But if you avoid paying tax because you failed to report income, that’s tax evasion.  

Underreporting cash sales, hiding interest in offshore bank accounts, and refusing to file a tax return when you’re legally required to do so are all examples of tax evasion.  

Section 7201 of the tax code says tax evasion is a felony, and lots of famous people have gone to prison for it.  

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