What is the difference between tax avoidance and tax evasion?

Tax avoidance is legal, as it involves the strategic planning and use of legal methods to minimize tax liabilities, such as taking advantage of deductions, credits, or exemptions allowed by law. Taxpayers engage in tax avoidance to ensure they comply with tax regulations while legally reducing the amount they owe.

On the other hand, tax evasion is illegal and involves intentionally misrepresenting or concealing information to reduce tax liability. This can include underreporting income, inflating deductions, or hiding money in offshore accounts.

Understanding this distinction is crucial for both individuals and businesses, as engaging in tax evasion can lead to severe penalties, including fines and imprisonment, whereas tax avoidance, when done properly, is a legitimate and encouraged practice to optimize taxes responsibly.