Definition
Tax evasion is the illegal evasion of taxes by individuals, corporations, and trusts. Tax evasion often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions.
Tax Evasion
What is ‘Tax Evasion’
Tax evasion is an illegal practice where a person, organization or corporation intentionally avoids paying his true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties. To willfully fail to pay taxes is a federal offense under the Internal Revenue Service (IRS) tax code.
Explaining ‘Tax Evasion’
Tax evasion applies to both the illegal nonpayment as well as the illegal underpayment of taxes. Even if a taxpayer fails to submit appropriate tax forms, the International Revenue Service (IRS) can still determine if taxes were owed based on the information required to be sent in by third parties, such as W-2 information from a person’s employer or 1099s. Generally, a person is not considered to be guilty of tax evasion unless the failure to pay is deemed intentional.
Criminal Charges
Failure to pay proper taxes can lead to criminal charges. In order for charges to be levied, it must be determined that the avoidance of taxes was a willful act on the part of the taxpayer. Not only can a person be liable for payment of any taxes that have been left unpaid but they can also be found guilty of official charges and may be required to serve jail time.
Determining Intent to Evade Taxes
When determining if the act of failure to pay was intentional, a variety of factors will be considered. Most commonly, a taxpayer’s financial situation will be examined in an effort to confirm if the nonpayment was the result of committing fraud or of the concealment of reportable income.
Evasion versus Avoidance
While tax evasion requires the use of illegal methods to avoid paying proper taxes, tax avoidance uses legal means to lower the obligations of a taxpayer. This can include efforts such as charitable giving to an approved entity or the investment of income into tax deferred mechanism, such as an individual retirement account (IRA). In the case of an IRA, taxes on the invested funds are not paid until the funds, and any applicable interest payments, have been withdrawn.
Further Reading
- A growth model of inflation, tax evasion, and financial repression – www.sciencedirect.com [PDF]
- Cheating ourselves: The economics of tax evasion – www.aeaweb.org [PDF]
- Tax evasion and inequity – www.sciencedirect.com [PDF]
- Tax evasion and self-employment in a high-tax country: evidence from Sweden – www.tandfonline.com [PDF]
- Tax changes and economic behavior: The case of tax evasion – www.sciencedirect.com [PDF]
- Taxes and economic behavior: Some interview data on tax evasion in Sweden – www.sciencedirect.com [PDF]
- Effect of tax avoidance and tax evasion on personal income tax administration in Nigeria – www.worldscholars.org [PDF]
