Those who commit tax evasion are often aware that they are carrying it out. Hoping not to get caught, they perform a felony with stiff consequences. The consequences of tax avoidance via illegal channels are pretty severe. Tax avoidance – illegal or legal – matters because it reduces the amount of taxes that are paid leaving the country short of funding. But what exactly is meant by tax evasion?
What is tax evasion?
Tax evasion is defined as the non-payment of one’s taxes by means of not reporting one’s taxable income, or by taking unallowed deductions. Tax evasion is also the criminal means of using illegal means to avoid paying one’s taxes. It is a crime to commit tax evasion and it comes with a hefty fine as well as jail time. One is also subjected to a black mark on their permanent record.
To convict someone of tax evasion, it is required that the prosecution prove that:
- An unpaid tax debt exists
- The defendant specifically attempted to evade or successfully evaded paying their taxes.
- The defendant specifically meant to evade the legal duty that exists on paying taxes.
Tax evasion, avoidance, or an honest error?
What if you are charged for tax evasion but you had simply made a simple reporting error? Although this is always a possibility, the Central Board of Direct Taxes is very clear about the difference between making tax-related errors and purposefully evading taxes. Mistakes in reporting include copying down the wrong information, transposition errors, math errors, and other obvious errors when it comes to filling out your tax forms.
It is quite simple to make an error considering the country’s complex tax laws. But it’s crucial to not mix up tax evasion with tax avoidance. Avoiding paying one’s taxes is a method where one reduces their own tax burden by deferring their income tax by contributing to financial instruments like life insurance, health insurance, and more. These can be claimed as legitimate tax deductions, and are deducted as valid business expenses. Alternatively, tax evasion looks like this:
– Willfully underpaying taxes
– Hiding money
– Falsifying one’s income records
– Inflating your expenses and deductions
– Underreporting one’s income
– Hiding income or interest in offshore account(s)
Here are five examples of evading one’s taxes:
One of the ways in which an individual falsifies records is by lying about their tax returns. When filing one’s tax returns, if one chooses to directly underreport their income and falsify documents that support this underreported income, this is classed as falsifying records. Perhaps one denies that they have an offshore account, or they do not report all the accounts they own or do not share all of the information they have about the nature of their income. Each of these cases can be perceived as intentional tax evasion and is accordingly considered criminal.
Under-reporting one’s income
We are all aware that one’s tax liability is based on one’s income numbers. If you were to reduce how much they earn, this would automatically lower their taxes. One can choose to under-report their income in two ways. One way is to directly misrepresent it. A second way is through a means known as structuring. Structuring is a means of artificially reporting one’s withdrawals, deposits, and transfers to a point that is below one’s bank reporting requirements. Under-reporting one’s income is carried out to avoid detecting one’s actual income, and it is considered to be a crime.
Typically, most people would not bury their money or hide it under a mattress so it can’t be found by a federal government. However, the interest earned from an offshore account is a handy way to dodge paying taxes, for those who feel like they should not have to. However, the interest earned from these accounts can add up really fast, especially if one has crores stashed away in foreign banks.
Purposely Underpaying Taxes
Perhaps you do not like the number that your tax preparer came up with. For this reason, you deliberately pay less than your return says that you owe. This is very easy to see and therefore catch. A rather mob-like approach to carrying out this strategy is money laundering. Let’s say that an overseas vendor owes you a lot of money. Instead of asking for cash, you tell the vendor to purchase items for you, while transferring the foods through a third party, and call it a gift. Since you wilfully bypassed reporting by saying that you received a gift, there is no cash income that you must report. This just happens to be worth the amount that the vendor owes you.
Illegally Assigning Income
A fifth way to hide money is by claiming that the income belongs to somebody else – may be a brother-in-law or somebody else. If you deliberately opt to assign income that is really yours, with the goal of reducing your taxes, this is considered to be tax evasion. As an example, let’s say that you earn a lot of money. The source of your income is split between five separate vendors. Instead of saying that your income came to you, you choose to pick out five other people and assign this income from one vendor to each of these.
Each of these individuals receives some of the money and gifts the remainder back to you. While it is not illegal to give monetary gifts, and it is not illegal to reassign income on its own, opting to do both together with the goals of purposefully reducing one’s tax liability turns into a kind of tax evasion felony.
The Bottom Line
Disguising, lying about, or directly misrepresenting one’s income, accounts, documents with the goal of evading tax is a crime. Highly illegal yet common tax evasion strategies involve money laundering, purposefully underpaying one’s taxes, hiding interest, under-reporting one’s income, falsifying one’s records.