Comment on this discussion post below and explain why you agree Tax avoidance and tax evasion do not share the same definition. The biggest difference between the two is tax avoidance is perfectly legal while tax evasion is a crime $($ACFCS$,2014,$ pp$.113-114,116).$ Let$$s look at a couple of examples of each. When someone deposits part of their income into a tax$-$deferred pension fund, they are practicing tax avoidance $$ using legal methods to their advantage to avoid paying taxes on income. Since they are protecting current income from taxes and will pay taxes in the future at the time the money is withdrawn, they are using a form of legal tax shelter $($TurboTax$,2024).$ Another term used to describe legal methods used to reduce taxes is tax mitigation, which could be as simple as taking a deduction to which one is entitled $($AccountingInsights$,2024).$ Conversely, when someone has a rental property and collects $$1,000$ a month rent from the tenant, yet when they prepare their tax return they do not disclose the $$12,000$ as income and leave it off their tax return altogether, they are committing tax evasion related to legitimate income. A drug trafficker is not going to claim their income as it would draw attention to them. This is also tax evasion, but related to illegitimate income. There are numerous other methods of avoiding and evading taxes, some simple, some more complex.

It is important for anyone working financial crime cases to understand the difference between tax avoidance and tax evasion, as well as having knowledge of tax laws that pertain to the jurisdiction where the offense$($s$)$ took place. When other crimes are involved, there may not be enough evidence to charge the perpetrator$($s$)$ with those crimes, but there may be sufficient evidence to charge them with tax evasion. It is equally important to understand what tax evasion is when analyzing financial records. Financial documentation supporting tax evasion may uncover and support other financial crimes that were committed $($ACFCS$,2014,$ p$.112).$ When those in the financial crime field understand what tax evasion is$,$ and is not, investigative resources can be accurately assigned to tax evasion cases and not wasted pursuing tax avoidance practices.

Some red flags indicating tax evasion are:

Tax filer chooses not to follow advice provided by accountant, attorney or tax preparer. Example: Client runs a general contractor business doing home remodeling work. Client is the only employee of the business. About half of his income is cash jobs. Sometimes he requests cash for the form of payment, other times customers choose to pay in cash. He only provides them with handwritten receipts and only if they ask for them. He keeps no formal records of these jobs as he does not want to claim the cash as income. He only keeps a notebook of any outstanding money so he can pursue collecting it in person. His accountant advised him he needs to issue invoices and keep records of payments received for all work he performs, regardless of the form of payment received. Client is adamant about not claiming the cash and claims he doesn$$t even know how much he made in the prior year since he did not keep track. Client decides to file his own tax return that year and does not claim any of the cash income from cash jobs.

Intentionally failing to share relevant facts with tax preparer relative to tax return. Example: Cash$-$intensive restaurant was impacted by COVID$-19$ pandemic, yet during $2020-2021,$ they matched their lost in$-$restaurant income by running successful takeout and delivery services. When they reopened in $2022$ and following in $2023,$ income was double pre$-$COVID income as customers were anxious to return to normal and get out of the house, plus the restaurant picked up a new customer based with takeout and delivery during COVID. When the restaurant owner filed tax returns for those years, they provided the tax preparer with records showing only half of the actual income for $2020$ through $2023,$ telling the tax preparer that the COVID pandemic significantly impacted their restaurant sales. This also fits the red flag of significant or repeated pattern of incorrect or understated income on tax returns.