Tax Evasion vs Tax Avoidance

compiled by Dib Mossavi

TAX EVASION is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions).

Tax evasion is an activity commonly associated with the underground economy and one measure of the extent of tax evasion the amount of unreported income, namely the difference between the amount of income that should legally be reported to the tax authorities and the actual amount reported. There were several attempts by some governments to measure unreported income and the tax gap. The tax gap is the difference between the amount of tax legally owed and the amount actually collected by the government.

TAX AVOIDANCE on the other hand, is the legal utilization of the tax regime to one’s own advantage, to reduce the amount of tax that is payable by means that are within the law. Both tax evasion and avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavorable to a state’s tax system.

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