By The Guillen Pujol CPAs Newsroom
In the bustling city of Danbury, Connecticut, business owner Bill G. Makros found himself facing the stark consequences of crossing the line in the ongoing debate over tax avoidance vs tax evasion. Makros, who owned and operated a local LLC, was sentenced to seven months in federal prison for tax evasion, followed by two years of supervised release. (U.S. Department of Justice, Danbury Business Owner Sentenced to Prison for Tax Evasion, Nov 2024.) His case underscores the critical importance of understanding and adhering to tax laws.
According to court documents, from 2016 through 2020, Makros’s business grossed over $1.4 million. However, he concealed income by diverting customer payments into personal accounts and cashing checks. Over five years, Makros failed to file his tax returns, evading $140,694 in taxes. In addition, during the COVID-19 pandemic, he fraudulently obtained $31,200 in COVID relief loans by submitting false IRS forms, claiming he had filed tax returns for 2019 and 2020. Upon sentencing, a federal judge ordered him to seven months in prison, two years of supervised release, and ordered him to pay $137,672 in restitution to the IRS–––––He pleaded guilty to tax evasion on July 1, 2024, following an investigation conducted by the IRS Criminal Investigation Division.
Makros’s case underscores the risks of tax evasion, which utterly differs from legal tax avoidance––and highlights the very real consequences at the heart of the Tax Avoidance vs. Tax Evasion debate.
Tax Avoidance vs Tax Evasion: They Key Differences
This ongoing challenge sits at the very core of the Tax Avoidance vs. Tax Evasion dilemma—a distinction that demands clarity and precision.
Each year, numerous small business owners and first-time entrepreneurs grapple with the challenge of minimizing their tax liabilities without venturing into illegal territory. This ongoing challenge sits at the very core of the tax avoidance vs. tax evasion dilemma–– a distinction that demands clarity and precision. As Wolters Kluwer aptly underscores, these two terms are not merely technical variations––they represent a legal and moral chasm. One is a legitimate strategy embraced by prudent taxpayers, the other a prosecutable offense that undermines the integrity of the tax system.
An academic perspective echoes this divide: A 2014 paper published by The George Washington University School of Business argues that while tax avoidance is legal, it often enters ethically murky territory––especially when used by large corporations to sidestep their fair share. The paper urges taxpayers and policymakers to weigh not only what is lawful, but what is equitable. One is a legitimate strategy embraced by prudent taxpayers, the other a prosecutable offense that undermines the integrity of the tax system.
Tax avoidance refers to the legal, strategic reduction of tax liabilities by utilizing provisions within the tax code. This practice includes claiming deductions, utilizing credits, and structuring income to minimize taxes within the law (Test your knowledge: Tax Avoidance and Tax Evasion, IRS.gov). For instance, maximizing contributions to a 401(k) retirement account, deducting legitimate business expenses, or investing in tax-deferred accounts are all examples of lawful tax avoidance. Major corporations and small businesses alike employ CPAs with tax expertise to navigate these legal avenues and minimize their tax obligations.
The U.S. tax code is intricate, filled with incentives designed to encourage specific behaviors such as investing in renewable energy, hiring employees, or saving for retirement. Utilizing these incentives is not only a legal form of tax avoidance but often encouraged to promote economic growth and societal benefits.
Conversely, tax evasion involves deliberately misrepresenting or concealing financial information to illegally reduce tax liability. This illegal activity includes underreporting income, inflating deductions, hiding money in offshore accounts without disclosure, or using shell companies to obscure ownership. The Internal Revenue Service (IRS) and the Department of Justice aggressively pursue tax evaders, with penalties ranging from substantial fines and asset seizures to imprisonment.
The difference between tax avoidance and tax evasion often hinges on intent and transparency. Legal tax avoidance involves using existing tax laws to minimize taxes, such as deducting legitimate business expenses or deferring income legally. In contrast, illegal tax evasion involves deceit, such as falsifying income reports or hiding money offshore. A helpful litmus test is the IRS Form 14242, which allows individuals to report suspected abusive tax schemes. If a strategy seems too good to be true—promising near-zero taxes without logical explanation—it probably is.
How to Stay Compliant While Practicing Legal Tax Avoidance and Tax Minimization
Tax minimization––the art of lowering one’s tax liability through forward-looking strategy and lawful planning––is a cornerstone of responsible business management. For taxpayers seeking to reduce taxes legally, several strategies can be effective:
- Hire a Certified Public Accountant (CPA): A CPA can provide expert guidance on navigating tax laws and identifying legitimate deductions and credits.
- Utilize Tax-Advantaged Accounts: Contributing to accounts like 401(k)s, Individual Retirement Accounts (IRAs), and Health Savings Accounts (HSAs) can significantly reduce taxable income.
- Claim Legitimate Business Deductions: Deductions for home office expenses, travel, and equipment can lower tax liabilities when properly documented.
- Choose the Appropriate Business Structure: Structuring a business as an S-Corp or LLC can offer tax benefits. For instance, S-Corps allow business owners to avoid double taxation by passing profits through to shareholders’ personal tax returns, taxed only at individual rates. LLCs, meanwhile, offer flexibility. By default, they’re taxed as pass-through entities (sole proprietorship/partnership), but owners can elect S-Corp or C-Corp status to optimize deductions or reduce liability.
- Stay Informed: Keeping abreast of IRS updates and changes in tax laws helps avoid costly missteps.
Facing an IRS Audit Due to Tax Avoidance or Tax Evasion? Here’s What to Do
If you receive an audit notice, consider the following steps:
- Consult a Tax Professional: Seek immediate advice from a tax attorney and CPA.
- Cooperate Fully: Provide requested information promptly but avoid volunteering additional details.
- Gather Financial Records: Ensure all financial records align with your tax filings.
The Bottom Line
Tax planning is a smart financial strategy, but tax fraud is a felony. As cases like Bill G. Makros demonstrate, tax evasion offers only short-term gains with long-term consequences. The IRS’s advanced tracking and international cooperation agreements are making it harder to get away with financial deception.
For taxpayers who may have unknowingly engaged in questionable tax practices, the IRS offers a Voluntary Disclosure Agreement (VDA) program. This is an avenue to come clean, correct past noncompliance, and often avoid criminal charges. While it does not erase the offense, it can significantly reduce penalties and provide peace of mind. Legal guidance is essential: navigating a VDA without an experienced CPA or tax attorney could risk compounding the problem rather than resolving it.
If you believe you may have tax compliance issues and want to explore the VDA program, our team at Guillen Pujol CPAs can guide you through the process to help mitigate penalties and ensure compliance. Contact us today for a confidential consultation.
The best strategy is to work within the system—not against it.
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Editor’s Note: This post is part of the ‘The GPCPAs Info Hub,’ an initiative dedicated to empowering you with the knowledge and strategies needed to navigate the complexities of the U.S. tax system and financial strategies. Visit our Information Hub, a curated resource offering the latest in tax, economic, and business news, alongside actionable guidance on tax strategies, accounting, and business advisory—because Planning Tomorrow, Together starts here.
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