Q1. What is tax avoidance?
Tax avoidance is the legal practice of reducing tax liability using deductions, exemptions, and government-approved strategies.
Q2. What is tax evasion?
Tax evasion is the illegal act of deliberately hiding income or falsifying records to avoid paying taxes.
Q3. Why is tax avoidance legal?
Because governments design tax laws with allowances and exemptions to encourage saving and investment.
Q4. Why is tax evasion a crime?
It cheats the government of revenue and undermines public services, making it punishable with fines and jail.
Q5. Can tax avoidance turn into tax evasion?
Yes. Aggressive schemes that exploit loopholes may cross the line into illegality.
Q6. What are examples of tax avoidance?
Investing in retirement accounts, claiming business expenses, or using tax-saving bonds.
Q7. What are examples of tax evasion?
Underreporting income, hiding foreign assets, or fabricating invoices.
Q8. What are the penalties for tax evasion?
Heavy fines, interest on unpaid taxes, audits, and possible imprisonment.
Q9. How can individuals avoid tax evasion risks?
By keeping proper records, filing on time, and consulting qualified accountants.
Q10. How does the difference impact financial planning?
Smart taxpayers focus on legal avoidance to save money, while steering clear of practices that may be seen as evasion.