An Overview of Tax Evasion in the U.S.

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Taxpayers in the United States often complain that their taxes are too high and their salaries are too small, sometimes going to the lengths of not even paying their taxes. But the phenomenon of tax evasion has widely been observed with those who earn the most, such as bankers, politicians, celebrities, and CEOs. In this brief guide the phenomenon of tax evasion in the United States will be discussed, as will prevalence, most common types of evasion, and common circumstances.

What is Tax Evasion?

According to the free online legal dictionary, tax evasion is “the process whereby a person, corporation, trust, and other entities, through commission of fraud, unlawfully pays less tax than the law mandates”. Tax evasion is a criminal offense under federal and state statutes. A person who is convicted of such a criminal offense is subject to a prison sentence, a fine, or both. It necessitates that a taxpayer deliberately misrepresents the true state of their tax affairs to tax authorities in order to avoid their dues and liability, and usually includes dishonest tax reporting (like declaring less income) or overstating deductions.

Prevalence of Tax Evasion

According to a report from Reuters, the United States ranked first on a list of top ten countries where tax evasion was most prevalent. The U.S. loses $337.3 billion due to tax evasion, and greatly contributes to the estimated global tax evasion of 5% of the global economy. According to the same report, around 42% of Americans believe that President Barack Obama’s fiscal policies favor Wall Street, giving them the incentive to not pay taxes. In other words, tax evasion occurs often in the United States.

Most Common Types of Tax Evasion

Some of the most common types of tax evasion occur by accident. The legal activity of tax avoidance (which is done through truthful reporting with deducting charity contributions and various tax credits) can sometimes be taken as tax evasion, which results in hefty fines and imprisonment. The unintentional misfiling or forgetting to file of one’s income tax is a misdemeanor, but a repetitive pattern of such behavior results in serious consequences.

The evasion of value added tax (VAT) and sales tax has been known to happen in businesses and other producers by under-reporting the amount of sales. Because there is no broad-based consumption tax at the federal level, the U.S. does not see evasion of VAT as much.

Most Common Circumstances

According to the BBC, there are many classic universal tax schemes that have been around for a long time. Tax reliefs, or tax credits, have been taken advantage of in every country. Wealthy individuals have too much disposable income that they do not want to contribute to taxes. So instead they pass the money into a pension plan, donate money to a charity, or invest in a thriving business. The latter is known as Enterprise Investment Schemes and are designed to encourage wealthy investors to give their money to a promising but risky business due to a tax relief on their own income.

Employing a spouse has also been seen as a common circumstance in tax evasion. The individual is paid a salary, but do little work and pay little or no tax. This allows the income to be divided into two, levying the amount owed to taxes.

Other schemes include investing large sums of money in offshore accounts and setting up businesses in tax havens, such as Ireland or Hong Kong, where the taxes are either very low or do not exist.

Byline

Perry Nickerson writes on taxation, finance, law, mutual funds, commerce & trade and other related issues. Those curious about the field of taxation may want to view the potentially lucrative accounting jobs with moneyjobs.com.