What is Tax Evasion? Types, Examples, and Penalties
The deliberate and illegal act of running away from taxes is called tax evasion. This unlawful activity deprives the U.S. government of billions in tax revenue per year, which could have helped in supporting its pandemic-stricken economy. Knowing how to prevent tax evasion will not only save your company from huge monetary penalties and jail time but will also help improve the American way of life.
In the fiscal year 2020, the United States Sentencing Commission (USSC) recorded 324 tax fraud cases — 45.5% lower than the recorded cases in the fiscal year 2016.
Despite the decline, the U.S. government still loses nearly $90 billion per year. On a global scale, the amount lost annually to tax abuse climbs up to $427 billion.
Paying taxes is a social responsibility, regardless of business size. It funds the government in improving public services, raising the standard of living, funding businesses during economic downturns, and supporting job creation.
To prevent companies from eluding their tax obligations, the creation of a new global tax system is currently underway. It is set to be implemented in 2023.
While waiting for the progress of the global minimum tax, let’s dig deeper into tax evasion to better understand what it is, including its possible implications.
What constitutes tax evasion?
Tax evasion is the willful attempt to avoid paying taxes. It is categorized into two forms:
1) Evasion of assessment
This refers to the intentional act of falsifying returns to defeat or evade tax. Some examples include underreporting income or claiming irrelevant deductions.
2) Evasion of payment
This occurs when the taxpayer deliberately hides money or assets “from which the tax could be paid.” Hiding the assets in a foreign bank account, for example, is a form of evasion of payment.
Here are the other examples of tax evasion activities that you must avoid at all costs:
- Paying employees in cash and not reporting it to the IRS
- Using a fake social security number
- Altering and/or fabricating business income or expenses
- Using several financial ledgers
- Overstating deductions
- Making false invoices
- Failing to file tax returns
- Destroying records
- Not reporting income made overseas or transactions using cryptocurrencies
- Failing to report income from illegal activities
If you’re having difficulties in paying your taxes, seek the help of a tax professional to find legal ways to reduce your tax liabilities. Never resort to illegal means of avoiding your taxes as it can only result in negative consequences.
How to prove tax evasion?
The key elements of the offense for both evasions of assessment and payment — as stated in the Tax Crimes Handbook from the IRS — are:
- an attempt to evade or defeat a tax or the payment of a tax,
- an additional tax due and owing, and
The defendant will be convicted of tax evasion if these elements are present beyond a reasonable doubt.
Honest mistakes such as errors on returns or late tax payments don’t count as tax evasion.
What are the penalties for tax evasion?
A person who intentionally evades or defeats taxes is guilty of a felony, Section 7201 of the Internal Revenue Code states. The maximum permissible fine for this crime, as amended*, is $250,000 for individuals and $500,000 for corporations. The prison time, meanwhile, is up to five years.
The offender may be subject to paying the fine or serving jail time, or both, along with the costs of the prosecution.
*The Criminal Fine Enforcement Act of 1984 increased the maximum permissible fines for felony offenses to $250,000 from $100,000. This applies to all offenses committed after December 31, 1984.
Tax evasion is different from tax avoidance
Whereas tax evasion is illegal, tax avoidance is considered legal and is even encouraged by the IRS as long as individuals and businesses follow the right protocols.
Tax avoidance happens when a business seeks legal ways to pay the lowest amount of taxes possible by availing tax credits, exemptions, and/or deductions. Some organizations also engage in charitable activities to reduce their tax liability.
How to prevent tax evasion?
Tax evasion is a serious issue. The monetary penalty and the time in prison shouldn’t be ignored either.
How should you prevent it then?
Reporting your income and filing your taxes honestly and timely are the non-negotiable activities you must do. It’s also important to provide clear information and regular training to your staff to ensure they know the difference between tax evasion and tax avoidance.
Conducting third-party due diligence with the help of an external auditor can also guarantee that you’re operating by the books.
Most importantly, always ask for the help of a certified tax accountant to avoid unnecessary mistakes when filing your tax returns.
Guiding clients in paying the right taxes
Following the law is always better than getting apprehended by the law. This is why D&V Philippines makes sure to follow all relevant laws and accounting standards in whatever we do.
If you need help in preparing your tax returns and maximizing legal and allowable tax deductions, get the help of our tax accountants. Contact us today or download our whitepaper, Finding the Right Talents: D&V Philippines’ Solutions to Modern Accounting Firms, to understand the solutions we have for you.