Tax evasion is the means through which persons make use of illegal opportunities to avoid paying their taxes, they could do so by making false statements about their income, inflating their deductions or setting up offshore accounts to hide their money. The problem of tax evasion is humungous and at the same time is underappreciated, it is reported that at least one out of every six dollars which is owed to the Federal government is not paid. Furthermore, it is also stated that the cumulative amount of taxes which are not sent to the Federal Government can be compared to about three-quarter the size of the deficit in the budget of the Central government, which is about $700 billion and with new techniques being uncovered, it may well get up to $1 trillion per annum in total. This tax evasion especially as it relates to income misrepresentations is usually associated with high income households than for low income earning families. Studies have shown that the 1% of American rich folks are the ones more guilty of evading tax using sophisticated techniques. This understanding gives rise to the issue of fairness and equity in taxation. Evading Taxes is an offence as described by Section 7201 of Tax Code.
Understanding Tax Evasion
The painful truth about tax evasion is that a person may become guilty of tax evasion unwittingly, which is why it becomes more than imperative to ensure that everyone possesses a layman understanding of tax evasion.
Tax evasion is a federal crime which is described in Section 7201 of Tax Code and by the description creates an avenue for the commission of not just one but two offences viz:
- The intentional attempt to evade and defeat tax assessment
- The intentional attempt to evade or defeat the payment of a tax
The wordings of the sections are reproduced thus:
Any person who willfully attempts in any manner to evade or
defeat any tax imposed by this title or the payment thereof
shall, in addition to other penalties provided by law, be
guilty of a felony and, upon conviction thereof, shall be
fined not more than $100,000
($500,000 in the case of a corporation), or imprisoned
not more than 5 years, or both, together with the costs of prosecution
To evade assessment, means to ensure that the true amount to be paid to the government by a taxpayer is not known by the government and as such a person may end up paying a lower amount as tax against the proper amount required by law. On the other hand, evading payment is the deliberate act of ensuring that after tax is determined, the payment is not followed through with, either because the funds or assets have been concealed. Furthermore, the particular section could be broadly interpreted to include the prosecution of anyone who is found to be assisting another person with the evasion of their taxes or their tax assessment.
Tax evasion essentially is different from Tax avoidance as the latter is a means through which a taxpayer uses legal means to reduce or avoid paying their taxes completely. Tax evasion may be a calculated decision or it may be unintentional, and in such cases, considerations may be given because for it to be considered as a criminal act, it must be proven that there was a criminal intention. To prove criminal intention, the individual’s financial situation would be checked to determine fraud or concealment of taxable income, this may be the case where funds are hidden by identifying them with someone else or making use of another person’s social security number to make reports.
Types of Tax Evasion
Some examples and common practices associated with Tax Evasion are listed below:
- Falsifying records: Through this means, when filling tax forms or questionnaire, the individual might intentionally and deliberately omit to mention some accounts they own either an offshore account or another account, which is not reported, or even failure to report accurate cash transactions may be deemed as tax evasion and it incurs liabilities on the individual
- Underreporting Income:This is usually an avenue for taxpayers to deliberately and intentionally lower their banking transactions in a way to avoid paying heavy taxes, it is a crime and the individual may be found out by the IRS.
- Hiding Interests:When a person receives funds and interests from offshore accounts and fails to report it, it constitutes a crime against taxes and it is punishable by the law.
- Deliberately refusing to pay taxes or underpaying the taxes owed is another quick way of falling into the trap of the crime of tax evasion.
- Assigning Income illegally: Another ingenious way of avoiding taxes is to say that the income belongs to someone else, this may seem smart but not only does it fall under the crime of tax evasion, it may very well be classified as identity theft.
- Bankruptcy Fraud: Through this medium, certain organisations may file for bankruptcy which legally stops the IRS from demanding for tax liabilities from the said organisation, whereas these organisations are not bankrupt, but this provision of the law may be abused to evade tax payments. This is also a criminal act and the organisation and the individual may be prosecuted for tax evasion.
Minimizing Tax Evasion
The epidemic of tax evasion is such that it requires drastic measures to be put in place as it is costing the United States a lot of money and it can be interpreted to be a form of stealing from persons who are legally paying their taxes.
The administration of President Joe Biden has decided that to fund the budget, there will be more investment in the IRS to increase the revenue generated from that area. To do this, the IRS would need to carry out more audits, and they would also need a lot more access to reliable data. It is also important to ensure that the Tax laws are restructured in such a way that it would set more appropriate penalties for tax defaulters. These actions may help to reduce the tax gap and also ensure that taxpayers do not assume that the tax system is programmed in a way to favour the rich.
One thing of importance to note is that taxpayers may find a way to earn funds from enforcing tax laws. They may do this by whistleblowing, in 2018 it was reported that a total of $1.44 billion was recovered from Tax defaulters and from this sum, whistleblowers earned their own share to the tune of $312 million. This surely encourages more people to tell on those who have decided to defraud the government and their fellow citizens.
Where there are concerns for their anonymity, laws have been enacted that ensures that the identity of a whistleblower is protected which would enable them to report such criminal activities without fear. However, when reporting these criminal activities, credible evidence must first be gotten and the whistleblower is also saddled with the responsibility of leading the authorities to the recovery of this monies hidden away, and when the evidence leads to the recovery of taxes owed, the whistleblower is then entitled to 30% of the total sum recovered.
In conclusion, everyone should endeavour to pay their taxes to avoid the embarrassment that comes with being caught, and where a person consistently neglects to pay their taxes, there is a duty on every tax payer to report such persons to the appropriate authorities for proper and further action.