Tax evasion is the use of illegal methods to avoid the full payment of taxes. The amount of money that a person or business owes the government in taxes is called a tax liability. Tax evaders use a number of strategies to reduce their liability. Such strategies may include submitting false information to tax authorities, failing to report sources of income, or overstating deductions and exemptions (amounts that can be subtracted or excluded from taxes owed). Tax evasion is a criminal offense in most countries. Punishments for tax evasion include fines, imprisonment, or both.
At its most basic level, tax evasion involves simply staying outside of the tax system. Many tax evaders try to keep incomes and business activities hidden from tax authorities. Certain practices—such as making unrecorded cash transactions or transferring income to offshore (foreign) bank accounts—are difficult for authorities to detect. Tax evaders may also seek to mislead authorities. For instance, they may forge financial documents, or they may claim personal money withdrawals as business expenses.
Pyramiding is a common form of tax evasion among businesses. It occurs when a company withholds taxes from its employees but does not submit the money to the government. Some businesses use “daisy chain” schemes to evade taxes. Such schemes involve the use of multiple, often fictitious, companies, partners, or trusts to hide income or deceive authorities.
Tax evasion differs from tax avoidance, which is the attempted reduction of a tax liability through legal means. Many people and businesses hire lawyers or other experts to ensure that they pay no more than the minimum amount of tax required by law. Some methods of tax avoidance take advantage of irregularities and loopholes in tax laws or differences in tax policies from one area to another. Such methods are sometimes difficult to distinguish from tax evasion.
See also Income tax ; Taxation .
