Tax Evasion vs. Tax Avoidance

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Tax Evasion is the use by the taxpayer of illegal or fraudulent means to defeat or reduce the payment of a tax. It is punishable by law.
Examples: Deliberate failure to report taxable income or property; deliberate reduction of income that has been received.

Tax Avoidance is the use by the taxpayer of legally permissible means or methods in order to avoid or reduce tax liability. It is not punishable by law.
Examples: Situations where a person refrains from engaging in some activity or enjoying some privilege in order to avoid the incidental taxation or to lower his tax bracket for a taxable year to avoid the higher rate of tax.

Tax evasion should be applied to the escape from taxation accomplished by breaking the letter of the law for example deliberate omission to report a taxable item. Tax avoidance on the other hand, covers escape, accomplished by legal means which may be contrary to the intent of the sponsors of the tax law but nevertheless do  not violate the letter of the law.

Source: Textbook on Agrarian Reform and Taxation by Hector de Leon
            Fundamentals of Taxation