Legal Definitions - Tax evasion

Tax evasion refers to the illegal act of deliberately avoiding the payment of taxes owed to the government. It involves intentionally misrepresenting one's financial situation through deceitful or unlawful means to reduce or eliminate a tax liability that legally exists. This is distinct from legal tax avoidance strategies, which use lawful methods to minimize tax burdens. Tax evasion is a serious crime that can result in substantial fines, imprisonment, or both.

Here are some examples illustrating tax evasion:

• Example 1: Underreporting Income from a Service Business

  A freelance web developer, Sarah, completes several projects throughout the year, receiving payment directly into her personal bank account for some, and cash for others. When preparing her annual tax return, she meticulously reports all the payments received via bank transfer but intentionally omits a significant portion of the cash payments from her income records. By doing so, she knowingly underreports her total earnings to pay less income tax than legally required.

  This illustrates tax evasion because Sarah's deliberate act of not reporting all her cash income is an illegal misrepresentation of her true earnings. She is using deceit to avoid paying taxes she legally owes.

• Example 2: Concealing Payroll and Business Expenses

  Green Thumb Landscaping Inc., a small business, routinely pays some of its employees and contractors in cash "under the table" without reporting these wages to the tax authorities. The company also fails to withhold and remit payroll taxes (like Social Security and Medicare contributions) for these employees. This scheme allows the company to reduce its reported profits and avoid paying its share of corporate income tax, as well as its employer-side payroll tax obligations.

  This demonstrates tax evasion because Green Thumb Landscaping is intentionally concealing employee wages and avoiding payroll tax obligations. This is a deliberate misrepresentation of its financial activities to illegally reduce its tax burden.

• Example 3: Hiding Foreign Assets and Income

  Mr. Henderson inherits a substantial sum of money from a foreign relative. Instead of depositing it into a U.S. bank account, he opens an undeclared bank account in a country known for financial secrecy. He then earns significant interest on this hidden money but never reports the existence of the account or the interest income to the U.S. tax authorities, despite being legally required to do so.

  This is an example of tax evasion because Mr. Henderson's intentional failure to disclose the foreign bank account and the income it generates is a clear act of deliberately hiding assets and income to avoid paying taxes that are legally due on those earnings.