What is Tax Evasion?
Tax evasion is the illegal act where an entity or the person intentionally misrepresents the state of affairs to reduce the actual tax liability and includes fraudulent tax reporting, like showing less income, gains or profits than actually earned and overstating the deductions.
People who are caught in tax evasion cases are usually subject to substantial penalties and criminal charges. An intentional failure in paying taxes is federal offense or crime under (IRS) Internal Revenue Service tax code.
Types of Tax Evasion
The Internal revenue service states two forms, namely, evasion of the assessment and the evasion of the payment.
#1 – Evasion of Assessment
The individual or the company should perform any action which is focused on defeating the tax assessment. It requires something more than proof of negligence. Any deliberate under-reporting of affairs qualifies for an attempt to evade. If the person transfers the assets to intercept IRS from determining the correct tax liability, then it is said to be an attempt to evade the assessment.
#2 – Evasion of Payment
If the taxpayer tries to hide the assets after the tax is due and owing, then it is a clear attempt to evade the payment. The acts done to evade the payment include the concealment of the assets or money with which tax could have been paid. Such actions also include the removal of assets or money from IRS reach like transfer in the foreign bank accounts. Merely failure in paying the taxes owed is not the evasion of the payment, but it is the concealment of assets in accounts of family members.
Examples of Tax Evasion
Hazel is the server at a very popular Chophouse. She earns on an average an amount of $200 every night through tips. The employer of Hazel does not keep any track of tips given to the servers as he relies on them to note down the same in the logbook. Hazel deliberately reports a small amount on her tax return that she mentioned in the employer’s logbook that averages an amount of $50 every night. It was an attempt to lower down the obligation of income tax expenseIncome Tax ExpenseIncome tax is levied on the income earned by an entity in a financial year as per the norms prescribed in the income tax laws. It results in the outflow of cash as the liability of income tax is paid out through bank transfers to the income tax department..
According to the rules, the servers have to report the tips given to them as their income. Hence, tax liability exists. Here, Hazel took action all round the year, intending to evade tax obligation. She has committed a felony crime by doing tax evasion.
An individual running an electric shop of his own was sentenced with 14 months of imprisonment, four years of the supervised release for the tax evasion, and was penalized for paying an amount of $140,000 in restitution to IRS. The owner made an intentional attempt for evasion of paying the taxes on his federal income by scooping off the gross receipts from his electric business and in addition to that paying the personal expenditures from business accounts and stating them as the business expenditures.
He used to direct his employees to seek the checks from the clients in his name and not in the business name. He en-cashed these checks, but he did not deposit the cash into the bank account of the business. As these monies did not appear in books of business nor deposited in business’ bank account, so these receipts were not included in his income tax return. He used to show personal expenditure as his firm’s expenditures, which resulted in low figures on the Schedule C profit, and thereby reducing his tax liability substantially for the tax years 2004 through 2007.
- Tax evasion cannot be considered as making a mistake. As the tax forms are a little complicated, mistakes do occur. If any taxpayer files the taxes after making any mistake on tax return forms, then they are not guilty of any charges. If the IRS believes that any taxpayer made a deliberate mistake, then he has to prove the same. If underpayment was just an error, then the taxpayer will be asked to pay a deficient amount with a nominal fine or interest on the deficient amount. If these fines are not paid then, criminal charges may be filed against them.
- Tax evasion is very much different from tax avoidanceTax AvoidanceTax avoidance is the process of reducing the income tax liability of an individual or firm by adopting the lawful methods. The taxpayers can claim exemptions and deductions as allowed under the nation's tax provisions. Such as investments in municipal bonds and deductions for business loss.. When a person acts illegally to avoid tax payments, then it is said to be tax evasion. Whereas when laws are being used for the benefits in a way that is not initially intended by law, to reduce tax liability is termed as tax avoidance. It is when one takes illegal measures to avoid paying taxes. It often results in another kind of consequence.
Tax evasion is a crime where an entity or individual deliberately avoids payment or underpays the taxes. Every citizen who is generating income and/or the assets are required to file the income tax return every year. There are too many people who every year misrepresents the amount of money earned, and they claim wrong or overstated deductions, which are not allowed in an attempt to keep the monies away from IRS. The government of U. S. gives an estimate that approximately $350 billion is lost every year because of tax evasion practices. The taxpayersThe TaxpayersA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws. should avoid it in order to save themselves from any penalties or punishments.
This article has been a guide to what is tax evasion and its meaning. Here we discuss 2 types (Evasion of Assessment and Evasion of Payment) and examples of tax evasion, along with benefits and disadvantages. You may learn more about financing from the following articles –