ANSWERS: 1
  • Tax avoidance is a legal practice designed to lower one's tax obligation. Taxable income is reduced by taking legal tax deductions, investing in tax shelters and making nontaxable money investments from earned income. There are no legal penalties for tax avoidance.

    Identification

    Tax avoidance employs loopholes to avoid paying higher taxes. Options for paying lower taxes include taking legal deductions and accepting legal tax credits.

    Significance

    Tax avoidance gives people the ability to lower their taxable income through investments such as mutual funds as opposed to taxable interest on saving accounts. Taking business deductions and tax credits allow people to pay less in taxes on income earned without any penalties or negative ramifications.

    Function

    Tax avoidance lets people invest their money in a multitude of ways to receive tax credits and deductions without breaking the law.

    Types

    Tax avoidance is different from tax evasion. Tax evasion is not paying the amount of tax you owe to the government. Tax evasion is punishable by fines and incarceration.

    Punishments

    The punishment for minor tax reporting errors, such as wrongly calculating the amount of tax owed, filing late or not filing the right kind of forms, are fines and the obligation to remedy any mistakes. Punishment for more significant and major tax evasion can be five or more years of jail time and substantial fines.

    Source:

    Tax Evasion Penalties Explained

    FAQ for the IRS

    More Information:

    Definition of Tax Avoidance

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