Tax evasion is illegal circumvention of taxes by corporations, trusts, and individuals. Often times, tax evasion involves taxpayers intentionally distorting the reality of their financial situation to the tax authorities. This is done in order to decrease their tax liability. Tax evasion involves deceitful tax filings, such as overstating deductions, showing a reduced amount of income, or declaring profits or gains that are different from amounts truly earned. A typical measure of the magnitude of the tax evasion, or the “tax gap”, is the total of unreported income. Unreported income is the variance between the amount of income which should have been filed and the actual amount.

 

Tax avoidance, however, is using tax laws, legally, to reduce a person’s tax burden. Even though tax avoidance is the legal use of tax laws, both tax avoidance and tax evasion are sometimes viewed as a type of tax noncompliance. They can be viewed in this way because they involve activities which are meant to undermine a state's tax system. This classification of tax avoidance is often discussed, however, since the tax avoidance is lawful, within self-created systems.