Question

Define tax avoidance and tax evasion. What are some examples of each? Post your response in complete sentences here to receive full credit. Give details to support your answer.

Answer 1

Tax Avoidance: It refers to when a person/company makes use of legal methods to minimize their taxes. In simple words it can be referred to as "minimization of taxes". This is not considered to be illegal and makes use of known tax deductions, credits etc.

Some examples are:

1. Utilization of various tax deductions to lower the business income.

2. Tax deferral plans are another famous example of tax avoidance. Many organizations make use of these plans to reduce their tax liability such as setting up 401(k) plan etc.

3. Another famous example of tax avoidance would be "tax loopholes". Tax laws of no country are considered to be perfect. There will always be some loopholes and many companies tend to exploit these loopholes to avoid paying taxes or to reduce their tax liability.

Tax Evasion: Tax avoidance and tax evasion both are methods of avoiding to pay taxes. However the biggest difference both is that tax evasion refers to the use of illegal methods to evade the payment of taxes whereas as stated above, tax avoidance includes the use of legal methods such as tax deductions and credits to reduce the tax liability.

There are several examples of tax evasion which are as follows:

1. Despite being strictly monitored by almost every country and even though strict laws are imposed in this area, many companies accross the globe still try to under-report their income.

2. In the 1st point, we talked about under reporting of income, however there are also many companies which not report their incomes at all to evade the payment of taxes.

3. Above 2 points are from an income point of view, however evasion of taxes is also possible by overstating the amount of tax deductions.

4. Making false entries in the books of accounts and claiming personal expenses as business expenditure are also some examples of tax evasion.