Tax Avoidance vs. Tax Evasion

In addition to preparing tax returns, practitioners may provide additional related services, such as tax planning. Practitioners who engage in tax planning and provide tax advice must keep these rules in mind.

Tax Planning

Tax planning to reduce tax liability is a legitimate goal. However, if the planning includes an element of fraud, deceit, or concealment, it becomes tax evasion. Practitioners who engage in tax planning should keep the following references in mind.

• IRC §7201 relating to tax evasion
• IRC §7206 relating to false returns, concealment, and other prohibited conduct
• Requirements for written advice under Circular 230, §10.37

Tax Evasion

IRC §7201 states that any person who willfully attempts to evade any tax imposed by the Code (including evasion of tax payments assessed under the Code) is subject to felony conviction. Upon conviction, IRC §7201 provides a fine of up to $100,000 ($500,000 for a corporation), or five years’ imprisonment, or both (along with the costs of prosecution).

Moreover, under the same Code section, a fine of up to $250,000 may be imposed for tax evasion.

Note: Although a practitioner may be convicted of tax evasion under the Code, other general federal crime provisions may also apply to their conduct. For example, a practitioner who assists in the commission of tax evasion may be liable as an accessory to the crime. The taxpayer may be convicted as the party primarily liable. A practitioner’s conduct may therefore violate both federal crime provisions and the Code.

The following provides some examples of tax avoidance and tax evasion.

Tax Avoidance

• Using an IRA or qualified retirement account to increase deductions
• Living in a house long enough to exclude up to $500,000 of gain from the sale of the principal residence
• Diversifying a portfolio and increasing tax-preferred income by holding foreign investments
• Claiming all legitimate deductions associated with a business

Tax Evasion
• Deducting an IRA or qualified retirement plan contribution when no contribution was made
• Excluding gain from the sale of a principal residence when the test was not met for either occupancy or ownership
• Failing to report investment income from foreign accounts
• Claiming personal expenses as business expenses


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