Tax avoidance is a strategy which involves exploiting legal means of reducing taxes with the goal of minimizing tax liability. Avoidance is a perfectly legal approach to handling taxes, although sometimes avoidance practices can stray into the realm of being abusive, at which point people may cross the line into tax evasion. In tax evasion, people utilize illegal means to avoid paying all or part of their taxes; evasion can result in prosecution and fines or prison time.
Most taxpayers engage in a certain amount of tax avoidance, because people want to avoid paying more taxes than they need to. In a simple example, most people claim all of the exemptions available to them. Likewise, people may take advantage of retirement accounts which offer tax savings if they plan on saving money for retirement; as long as one is putting money aside, one might as well reduce taxes at the same time. These tax avoidance strategies are usually encouraged by financial planners and accountants.
A skilled accountant can show a taxpayer where he or she can save on taxes, and provide advice about conducting financial affairs in a way which will limit tax liability. Accountants will usually not guarantee to reduce tax liability by a set amount or percentage, but they do pride themselves on finding as many ways as possible to generate tax savings for their clients.
Other tax avoidance strategies may be more aggressive. While still legal, they are sometimes deemed ethically questionable, and taxpayers may skirt the line between legality and illegality. Most accountants have personal limits when it comes to assisting people with tax avoidance, and while they will provide advice and help with fully legal activities, they may be reluctant to be involved in more gray areas. Aggressive tactics can include taking advantage of loopholes in the law which may be subject to interpretation, and not all accountants interpret these loopholes in the same way.
When people engage in tax avoidance, they are knowingly trying to reduce their taxes, but they are not knowingly breaking the law. Tax evaders, on the other hand, are aware of the fact that the means they are using are not legal, and they are choosing to engage in evasion activities despite this. Evasion tactics vary by nation, but include hiding or moving income so that it cannot be taxed even though it is legally taxable, or simply refusing to send in tax payments.
