What is the difference between tax evasion and tax avoidance?
UPDATED: February 20, 2013
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The courts recognize the fact that no taxpayer is obliged to arrange his/her affairs so as to maximize the tax the government receives. Individuals and businesses are entitled to take all lawful steps to minimize their taxes.
A taxpayer may lawfully arrange his/her affairs to minimize taxes by such steps as deferring income from one year to the next. (For example, interest on property sold on 12/31/98 is taxable as part of 98 income. If the property is sold on 1/1/99, it would be taxable as part of 99 income. This is legal to do.) It is lawful to take all available tax deductions. It is also lawful to avoid taxes by making charitable contributions.
Tax evasion, on the other hand, is a crime. Tax evasion typically involves failing to report income, or improperly claiming deductions that are not authorized. Examples of tax evasion include such actions as when a contractor "forgets" to report the $10,000 cash he receives for building a pool, or when a business owner tries to deduct $100,000 of personal expenses from his business taxes, or when a person falsely claims she made charitable contributions, or significantly overestimates the value of property donated to charity. Similarly, if an estate is worth $5 million and the executor files a false tax return, improperly omitting property and claiming the estate is only worth $100,000, thus owing much less in taxes.