DEFINITION of 'Loophole'

A technicality that allows a person or business to avoid the scope of a law or restriction without directly violating the law. Used often in discussions of taxes and their avoidance, loopholes provide ways for individuals and companies to remove income or assets from taxable situations into ones with lower taxes or none at all.

Loopholes are most prevalent in complex business deals involving tax issues, political issues and legal statutes. They can be found within contract details, building codes, tax codes, among others.


A person or company utilizing a loophole isn't considered to be breaking the law, but circumventing it in a way that was not intended by the regulators or legislators that put the law or restriction into place. Most loopholes will close in time, as those who have the power to do so rewrite the rules to cut off the opportunity for loophole advantage. Some tax loopholes exist perennially, especially in nations like the United States where the intricate tax code amounts to tens of thousands of pages - which can lead to many opportunitoes for those seeking to exploit it.

  1. Audit

    An unbiased examination and evaluation of the financial statements ...
  2. Formal Tax Legislation

    The process by which a proposed tax rule or tax change may become ...
  3. Estate Tax

    A tax levied on an heir's inherited portion of an estate if the ...
  4. Legislative Overkill

    A law enacted to stop or prevent the abuse of a loophole, but ...
  5. Generally Accepted Accounting Principles ...

    The common set of accounting principles, standards and procedures ...
  6. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
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  1. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
  2. Can the IRS audit you after a refund?

    The U.S. Internal Revenue Service (IRS) can audit tax returns even after it has issued a tax refund to a taxpayer. According ... Read Full Answer >>
  3. How does escheatment impact a company?

    In recent years, state governments have become increasingly aggressive in enforcing escheatment laws. As a result, many businesses ... Read Full Answer >>
  4. What happens if property is wrongfully escheated?

    If your financial accounts, such as bank, investment or savings accounts, are declared dormant and the managing financial ... Read Full Answer >>
  5. How do financial advisors help you avoid escheatment?

    Financial advisors can help you avoid the escheatment of your financial assets by regularly reviewing all of your accounts, ... Read Full Answer >>
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    Typically, 401(k) plans are not subject to state escheatment laws because they are covered under the Employee Retirement ... Read Full Answer >>

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