What is tax evasion?
The term “tax evasion” refers to an individual or group that does not pay the tax imposed on them by law. Depending on usage, the term can also refer to people who use tax evasion strategies despite technical compliance with the letter of the law.
Key points to remember
- “Tax cheater” is a colloquial term for individuals or organizations that don’t pay their taxes.
- It is generally used to refer to people who deliberately evade their taxes, although it can also refer to those who do so by accident.
- Common examples of tax evaders include those who fail to report income paid in cash or who pay their employees without making the necessary tax withholdings.
- “Tax cheating” can also refer to those who reduce their taxes legally, but in a way considered unethical.
- The IRS seeks to identify, fine and/or imprison tax evaders and has certain methods and programs to do so.
Understanding tax evasion
Governments rely on tax revenue to pay for expenses such as Health care, policing, public education, road infrastructure and the military. For many taxpayers, however, taxes represent a significant expense, creating a strong incentive to reduce one’s tax liability as soon as possible.
While some programs allow taxpayers to reduce their taxes legally—for example, by contributing money to an organization sponsored by the employer pension plan such as a 401(k)other authorized or legitimate deductions tax shelters—some people also use dubious tax shelters and other illegal means to avoid paying taxes.
Anyone who employs strategies to avoid paying taxes or who pays less tax than they should in an illegal way (or in a legal way that is considered unethical) is considered a tax cheat.
Stop tax evasion
Since tax revenues are essential for the government to finance its expenditures, the Internal Revenue Service (IRS) has various programs designed to deter, detect and punish tax evaders. For example, the IRS has a program in place where whistleblowers can report individuals or companies they suspect of evading their taxes. As an incentive to report these fraudthe IRS offers a potential whistleblower reward, paid if the report leads to a confirmed case of fraud.
The IRS also has the legal power to impose substantial penalties on tax evaders, including heavy fines and jail time.
Sometimes individuals can cheat on their taxes without even realizing it. This may arise due to the great complexity of modern tax law, which often requires professional accountants and lawyers to help advise individuals and businesses on their true tax obligations.
To help avoid accidental cheating, the IRS provides a range of searchable online resources for those wishing to learn about the US tax system.Additionally, there are various popular software packages that can help guide people through the process of paying their taxes.
Examples of tax evasion
An individual or an organization can be called a tax cheat in several ways. For example, whether intentionally or by accident, a person may work only in cash and refrain from declaring some or all of his or her Income when they file their taxes each year.
If their employer has not kept accurate records of these cash payments, it may be impossible for the IRS to track these transactions. For example, if a worker was paid $500 per week but only claimed to be paid $250 per week, he would pay less tax by providing this false information, making him a tax evader.
Nonetheless, failure to disclose cash income would technically be an example of tax evasion, potentially making the tax evader vulnerable to fines or other penalties if the individual is caught.
Other examples of how tax evasion can occur include overstating the value of charitable donations in order to benefit from an inflated income tax deduction, pay employees “under the table” without payroll tax deductions and not reporting gambling winnings or other exceptional sums.