Legal Definitions - evasion of tax

Evasion of tax refers to the illegal act of deliberately avoiding the payment of taxes owed to the government. It involves a taxpayer or business intentionally misrepresenting or concealing financial information to reduce their tax liability below what is legally required. This is distinct from tax avoidance, which involves legally using tax codes, deductions, and credits to minimize one's tax burden.

To be considered tax evasion, the actions taken must be intentional and designed to deceive tax authorities. If found guilty, individuals or businesses can face severe penalties, including substantial fines and imprisonment.

Here are some examples illustrating tax evasion:

• Example 1: Undisclosed Cash Income

  A self-employed contractor regularly receives cash payments for home renovation projects. To reduce their tax bill, the contractor intentionally records only a fraction of these cash earnings in their business ledgers and omits the rest when filing their annual tax return. They also instruct clients to pay in cash to avoid a paper trail.

  This illustrates tax evasion because the contractor is deliberately and illegally concealing a significant portion of their income from the tax authorities, thereby avoiding the taxes legally due on those earnings.

• Example 2: Falsified Business Expenses

  A small manufacturing company inflates its reported business expenses by creating fake invoices for services never rendered or supplies never purchased. These fictitious expenses are then deducted from the company's gross income, making its profits appear lower than they actually are.

  This constitutes tax evasion because the company is intentionally submitting false financial information to reduce its taxable income and, consequently, its corporate tax liability.

• Example 3: Unreported Foreign Assets and Income

  An individual maintains a substantial investment account in an offshore country and regularly receives interest and dividend payments from it. Despite legal requirements to declare all foreign income and assets, the individual intentionally fails to report this account or its earnings on their domestic tax returns.

  This is an example of tax evasion because the individual is knowingly and deliberately hiding significant income and assets from the tax authorities to avoid paying the required taxes on them.