What is Tax Evasion?

Published by Thomas Herold in Accounting, Laws & Regulations

The term 'Tax Evasion' is included in the Accounting edition of the Herold Financial Dictionary. Get yourself a copy now on Amazon - available as Kindle or Paperback.

Tax Evasion refers to the illegal actions undertaken by an individual, company, or other organization on an often international scale to get out of paying their fair tax burden in their home tax jurisdiction. Individuals who get caught evading their taxes often suffer from criminal charges and penalties that can even include several years in real and served out jail time. The Internal Revenue Service in the United States classifies such tax avoidance as a serious federal offense under its national tax code.

The idea behind tax evasion covers both an illegal underpayment of owed taxes as well as the illegal non-paying of taxes in their entirely. The way that such individuals become caught when they do not at all submit their tax forms to the IRS is through the IRS Internal Revenue Service’ s ability to figure out that their taxes are owed in utilizing the third party submitted base information including 1099s and W-2s from the employer of the individual in question. Such parties will not usually be convicted of deliberate tax evasion unless they are able to successfully and conclusively determine that it was done willfully and deliberately.

Deliberately not paying correct federally owed taxes though is a very serious matter. In fact it often ends with criminal charges being filed by the IRS or another national taxing authority in other developed nations. For such charges to actually be filed, the agency must first ascertain conclusively that the tax avoidance was done intentionally by the offending taxpayer. This means that the individuals may be forced to pay the taxes which were properly owed at the same time as they are found guilty of deliberately not paying their taxes and then made to spend time in jail.

In determining that the failure to pay their fair taxes proved to be intentional, many factors will be contemplated. The most common of these is the financial situation of the payer in an effort to learn if not paying resulted from deliberate fraud or otherwise attempting to hide reportable income from the tax authorities. Failing to pay can be deemed to be fraudulent in those scenarios where the taxpayer endeavored to hide assets by assigning them to a third party or lodging them in overseas bank accounts.

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Examples of this are by reporting earned income using a fake name or other person’s social security number. This might also be considered to be identity theft by the appropriate legal authorities. People can be judged as hiding income by not reporting work that did not pay according to traditional means. This might involve receiving cash payments in exchange for services and goods sold. When these sums are not properly reported to the IRS as income in the annual tax filing, then this constitutes willful and deliberate fraud.

There is an important and real distinction between tax evasion and tax avoidance as well. Tax evasion entails illegally making efforts to sidestep paying taxes which are actually owed. Tax avoidance is an entirely legal means of reducing the amounts of taxes owed by a taxpayer. Among these activities could be giving charitably to approved not for profits as well as investing income into tax deferred instruments like IRA individual retirement accounts. With IRAs, no taxes will be owed or paid on invested funds or their returns earned on them unless the funds are withdrawn early before retirement age is fully attained.

The term 'Tax Evasion' is included in the Accounting edition of the Herold Financial Dictionary. Available now on Amazon in Kindle and Paperback.