Tax evasion is not paying taxes by using illegal means. Tax avoidance is paying the minimum amount of tax using all available legal methods.

Because the tax laws in most developed countries are so complicated accountants are hired to ensure a company pays the smallest amount possible. In some cases giant multi-national firms pay no taxes at all. All quite legally.

Jail. (har-har)

Tax evasion involves breaking the law: not paying one's taxes where the law clearly states they must be paid. (This includes illegal tax avoidance.)

Tax avoidance (the legal kind) is defined in the 1995 Oxford Dictionary as "the arrangement of one's financial affairs so that one only pays the minimum amount of tax required by law."

There is nothing wrong with doing everything you can to minimize your tax liability, as long as you do not break the law, and that is where tax planning comes in. Tax planning includes but is not limited to:

• Avoiding income recognition
• Postponing income recognition
• Spreading income among related taxpayers
• Postponing or accelerating deductions

EXAMPLE OF TAX AVOIDANCE VS. TAX EVASION

Tax avoidance: Using tax deductions (itemized deductions on Sch A, business expenses on Sch C or Form 2106) to reduce your taxable income;

Tax evasion: Claiming erroneous tax deductions or exemptions, such as claiming a dependency exemption for a nonexistent dependent, deducting charitable contributions you did not actually pay, or deducting business or rental expenses you did not actually pay.