If a taxpayer uses an unlawful strategy to avoid paying taxes legally owed, this is referred to as tax evasion. Tax evasion can come with serious consequences such as a large fine and jail time.
The Difference Between Tax Avoidance and Tax Evasion
Often times, the line between tax avoidance and tax evasion is a fine line. For instance, a taxpayer who has a child under 16 qualifies for a reduction in his or her taxes. Asking for this deduction is legal tax avoidance. However, if a taxpayer claimed that he or she had a dependent under 16 but had no dependent, that would be fraud and an example of tax evasion.
The History of Tax Evasion
Tax evasion has been occurring as long as there were taxes to be paid. Typically, citizens of a country that had an income or value added tax avoided payment by paying off tax officials who would fail to report the evasion. Today, tax evasion is considered to be a major problem in less developed countries where sophisticated collection and reporting systems may be lacking.
In 1972, a research paper was written that examined why individuals would try to evade paying their fair share of taxes. The findings revealed that evasion was higher during times of unemployment and during times of dissatisfaction with government. Evasion rates were also linked to the tax rate itself. Not surprisingly, the rate of tax evasion was also associated with the likelihood of getting caught and the penalties associated.
Notable Examples of Tax Evasion
The most notable example of tax fraud occurred in 1929 and involved Chicago gangster Al Capone. He had been wanted for years on charges of murder and other crimes, but none of the charges resulted in a guilty verdict. However, he was eventually found guilty of tax evasion and spent time in prison.
Wesley Snipes was convicted of failing to file a tax return and had to spend three years in jail in addition to paying millions of dollars in back taxes to the IRS. He reportedly failed to file or pay tax because of his political views.
Many people know Abbott and Costello for their skit Who’s On First. However, most don’t know that the comedy duo was convicted for tax evasion in 1956, which forced them to sell the rights to many of their creative works. They would also be forced to sell much of their personal property as well.
The next time you want to avoid paying your taxes, you may want to think about the consequences of doing so first. You may have to pay back taxes, endure IRS levies of your property and spend time in jail. While you generally have an opportunity to make up for an honest mistake, it is almost always better to file an accurate return the first time.