Tax evasion and tax avoidance are two entirely distinct practises, each of which is characterised by a unique set of characteristics and carries a unique set of repercussions.

What exactly is Tax Evasion?

Tax evasion is a type of tax fraud that involves the use of illegal methods to conceal income or information from the HMRC or another tax authority in order to avoid the assessment or payment of taxes. Tax evasion is a form of tax avoidance.

Tax evasion can take many forms, including the intentional underreporting or non-reporting of income, the concealment of taxable assets, and the falsely claiming of tax deductions, credits, or deductions to which the taxpayer is not entitled.

Tax evasion can result in monetary fines, other penalties, and even time spent in jail.

What exactly does "tax avoidance" mean?

Tax avoidance refers to the practise of using legitimate means to lower taxable income or the amount of tax that is owed. Investing money in tax-advantaged accounts, as well as claiming tax deductions and tax credits that are legitimately available, are both common strategies.

The distinction between avoiding taxes and evading taxes through tax evasion

Lying to authorities and concealing financial information are the two primary characteristics that distinguish tax evasion from tax avoidance.

Take, for instance:

  • As long as you abide by the guidelines, lowering your tax liability (also known as "tax avoidance") through strategies such as contributing to a 401(k) plan or making a donation that qualifies for a tax deduction is entirely within the bounds of the law.
  • Tax evasion typically refers to the practise of concealing assets, income, or information in order to avoid liability.

Consequences of Tax Evasion

Intention is a factor in determining whether or not someone is guilty of tax evasion, so simply making a mistake on your tax return does not automatically make you a tax cheat. According to the HMRC, the following are some of the potential consequences that could arise as a result of your deliberate attempt to avoid paying taxes:

  • You have a record that includes a felony.
  • Five years behind bars, and/or a £5,000 fine
  • An administrative penalty of up to £250,000 (or £500,000 in the case of corporations).
  • A bill detailing the expenses associated with your prosecution.

Miller suggests that civil penalties are more likely than jail time in cases of intentional tax evasion; however, the former is still a distinct possibility. However, civil penalties add up, and according to him, they can easily double the amount of tax that was initially owed. Some examples include:

  • Failure-to-file penalties.
  • Underpayment penalties.
  • Punishments based on level of accuracy.
  • Compensatory interest for overdue fines

The risk of being subjected to a tax audit is increased when taxes are not paid. In most cases, an audit will only be conducted on your most recent three years' worth of tax returns. According to Miller, the statute of limitations is extended to a total of six years if a taxpayer fails to report 25% or more of their gross income on their tax return.

Your tax preparer may decide to fire you as well.

"We can only advise and guide, and say things like, 'OK, in this kind of case, you should really change this.' That's all we can do. According to Greg Freyman, a certified public accountant in Jacksonville, Florida, "This is not good." "And if the customer does not want to do it or does not agree with it, then it is up to us.... Should we be working with this client, and does this client uphold ethical standards?

Examples of Tax Evasion

There is no need for elaborate plans or clandestine gatherings in order to commit tax evasion. The following are a few illustrations of how something like this can occur much more frequently than you might imagine.

1. Making unauthorised payments for child care expenses

According to Freyman, the practise of paying a person who works for you in cash does not constitute tax evasion. What does, however, is a lack of communication with the HMRC and payments of payroll taxes. According to him, you should fill out Schedule H to report the wages you pay your employees and provide them with a W-2 each year. Not sure if you should count that household helper as an employee or not? You can decide with the help of HMRC Publication 926.

Freyman maintains that "income is income."

2. Ignoring revenue from other countries

According to Freyman, this is a common problem for people who have jobs or who own rental properties outside of the country.

"We have heard countless times, 'But my property is not in the United States,'" the attorney continued. He asks, "Why in the world should I report any income on it if it's a rental?" and the answer is that he doesn't see any reason to. "That's the one that trips up everyone every time. They believe that just because it occurred outside of the country, they are exempt from reporting it.

3. Financial investments in cryptocurrency

The use of virtual currencies will not allow you to bypass any hidden doors or passages. Even though cryptocurrencies are still relatively new, the HMRC has already issued regulations regarding them. Transactions involving cryptocurrencies are subject to taxation. In addition, taxpayers frequently fail to account for cryptocurrency holdings despite the fact that their value has increased.

Freyman issues the following warning: "They might get rid of it and not realise that that's still income."