What is Tax Evasion?
Definition: Tax evasion is where businesses and individuals use illegal practices through which they avoid fulfilling their tax obligations.
Every country that has an elaborate economic system and governance system requires its working citizens and businesses to pay tax. The tax money is then used to fund government activities such as infrastructure and economic development which in turn encourages the creation of companies and businesses. They subsequently create more jobs and enhance the livelihoods of many people.
Governments take tax payments very seriously because they cannot fulfill their obligations to the people efficiently if people do not pay tax. That is why tax evasion is considered a serious offense in which the offender can be fined heavily or even face jail time.
Tax evasion therefore happens when individuals and businesses intentionally conceal their incomes from relevant tax authorities. This can happen in the form of illegal underpayment where the taxpayer intentionally pays less tax than they are supposed to or illegal non-payment where the taxpayer completely and intentionally avoids paying taxes despite earning taxable income.
Taxes in the U.S are handled by the IRS which has a system through which it monitors the financials of those that are employed as well as business owners. The IRS also enforces the tax laws and it makes sure that anyone caught evading tax is brought to book. The revenue authority enforces strict penalties for offenders such as a jail sentence where the tax offender can serve as much as 5 years in prison. Alternatively, individuals can be fined as much as $250,000 and businesses are fined as much as $500,000 for tax evasion.
Tax Evasion vs Tax Avoidance – What’s the Difference?
Tax evasion and tax avoidance sound rather similar but they are different. Tax evasion involves the use of illegal means to avoid paying tax while tax avoidance is where taxpayers take advantage of legal means to lower their tax obligation.
Tax evasion is illegal and there is an intentional plan to avoid paying part or entire tax owed, while tax avoidance is legal and mainly focuses on lowering tax obligations.
Tax Evasion Examples
Tax evasion situations that many people may not know about
Tax evasion might be a simple concept but it has a broad spectrum. One might be evading tax unintentionally but at the end of the day, it is still tax evasion and it is punishable by law. Thus the importance of identifying such situations.
Failure to report cash from some of your businesses
If you happen to run multiple businesses, make sure that you report all your earnings from each business. Some may assume that if they report the income of one of their businesses, then they do not have to disclose their earnings from another business. The law requires taxpayers to disclose all their income sources.
Cryptocurrency earnings and transactions
There was a lot of excitement around the cryptocurrency market in especially in the early days due to the lack of regulatory oversight or control by a central authority. However, that is not the case because the IRS already created rules that are meant to prevent the use of cryptocurrencies for money laundering purposes or tax evasion. Cryptocurrency traders are required by law to declare their earnings even if it is cryptocurrency earnings. This means that an increase in the value of your cryptocurrency holdings is taxable.
Taxes on overseas income
Overseas income from business activities and rental income from other countries is also something that many people overlook especially if it is in a jurisdiction that has lower tax rates. Either way, anyone with earning income from overseas is still required by law to disclose their foreign earnings.
Non-recorded payrolls
If you have someone that depends on you for their income for whatever activity they perform for you, then that is still considered an income and they are on your payroll. It does not matter whether it is a mad or a gardener. You are still obliged to disclose then as wages because they are taxable.