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Tax avoidance vs tax evasion

The idea of who gets audited is one that seems to interest everyone. And of course it does, if there is are some tips on how it can be avoided, why wouldn’t you use them? Whenever I talk about the issue, though, I always harp on the idea that the best way to not worry about an audit is to make sure that your tax return is legitimate. If you fit in that legitimate category, then you can submit a return that uses the rules to your best advantage and know it will stand up to scrutiny. This doesn’t make an audit a fun experience, it will still be taxing (har har), but it won’t result in a huge financial hit.

Shedding some light on this issue was a recent tidbits column on taxes that I read. What it really comes down to is the issue between tax avoidance and tax evasion. Avoidance is the use of the rules to benefit yourself, while evasion is not paying what you actually owe. Evasion can come in many forms, be it underreporting income, making up expenses, shady bookkeeping practices, etc.  Whatever it is, it means you didn’t follow the rules in good faith.

This doesn’t mean that tax avoidance is always applauded, nor should it be. We all have heard stories about extremely wealthy people or corporations paying so little in taxes that it just feels wrong. Where you place the blame for that can vary and feel tough to place. Do you blame the person who takes advantage of a legal situation or do you blame those who instituted the rules in the first place? This can start to feel even worse when you realize that the IRS is understaffed and underfunded, which means less people are getting audited, and then you can’t help but think that people in such positions might be getting away with even more than they should.

And then if you personally get audited, how fair is that? What you should pay by any metric should be much lower than what others are getting away with, isn’t it? I think most people feel this way, but again, we can only do what we can within the rules under which we must play.

In the same article, it mentions mathematical errors being one reason that the IRS’s computer scanning could mark a return for potential audit.  Well, at least with ever more powerful electronic tools when it comes to preparing and filing, we can avoid that.

But it then mentions the potential marking of numbers that are out of the average range for those in similar positions to the taxpayer. Does that mean we shouldn’t use them, though, if they are legitimate? Of course not. Let this be the time when you can get back at the system. Maybe you made some moves that put you in a better spot than others, well then you should be able to reap all the benefits that come with that. At that point, you’re not doing any evading, you are just planning well. And no one should hold that against you, right?