Under the federal law of the United States of America, tax evasion or tax fraud is the purposeful illegal attempt of a taxpayer to evade assessment or payment of a tax imposed by Federal law. Conviction of tax evasion may result in fines and imprisonment.26 U.S.C. § 7201. Compared to other countries, Americans are more likely to pay their taxes on time and law-abidingly.
Tax evasion is separate from tax avoidance, which is the legal utilization of the tax regime to one's advantage to reduce the amount of tax that is payable by means that are within the law. For example, a person can legally avoid some taxes by refusing to earn more taxable income or buying fewer things subject to sales taxes. Tax evasion is illegal, while tax avoidance is legal.
In Gregory v. Helvering the US Supreme Court concurred with Judge Learned Hand's statement that: "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." However, the court also ruled there was a duty not to illegally distort the tax code so as to evade paying one's legally required tax burden.Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934), aff'd, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935).
Definition
The U.S. Internal Revenue Code, 26 United States Code section 7201, provides:
Sec. 7201. Attempt to evade or defeat tax
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.. For an individual, the $100,000 fine prescribed in this statute can be increased to a maximum of $250,000. See subsection (b), paragraph (3) of .
To prove a violation of the statute, the prosecutor must show (1) the existence of a tax deficiency (an unpaid federal tax), (2) an affirmative act constituting an evasion or attempted evasion of either the assessment or payment of that tax, and (3) willfulness (connoting the voluntary, intentional violation of a known legal duty).See generally Steven R. Toscher, J.D., Dennis L. Perez, J.D., Charles P. Rettig, J.D., LL.M. & Edward M. Robbins, Jr., J.D., LL.M., Tax Crimes, U.S. Income Portfolios, Vol. 636 (3rd ed. 2012), Bloomberg BNA.
A genuine, good faith belief that one is not violating the Federal tax law based on a misunderstanding caused by the complexity of the tax law is a defense to a charge of "willfulness", even though that belief is irrational or unreasonable.Cheek v. United States, 498 U.S. 192, 203 (1991).Steven R. Toscher, Dennis L. Perez, Charles P. Rettig & Edward M. Robbins, Jr., Tax Crimes, Tax Management Portfolio, Volume 636, Bloomberg BNA (3d ed. 2012). A belief that the Federal income tax is invalid or unconstitutional is not a misunderstanding caused by the complexity of the tax law,See generally Dan M. Kahan, "Ignorance of Law Is An Excuse -- But Only for the Virtuous," 96 Michigan Law Review 127, 146 (Oct. 1997). and is not a defense to a charge of "willfulness", even if that belief is genuine and is held in good faith.Lyle Denniston, "Court widens use of ignorance plea in tax cases," Baltimore Sun, Jan. 9, 1991, at .Cheek, 498 U.S. at 206.
The Beginning Money laundering, the term for filtering "dirty money", is believed to have come about when the mafia owned laundromats in the United States. Laundromats had been used to filter large amounts of money from illegal activities, including extortion, alcohol, and prostitution. Through leveraging a legal business, a laundromat, illegal earnings from the following activities could be legitimized as earnings gained by the laundromats. While Al Capone was convicted of tax evasion, it is noted how "his conviction may have been the trigger for lifting the money laundering business off the ground" (Dadoo, 2012; Krishna, 2008; "Al Capone: Biography", 2012). Al Capone, an infamous Prohibition-era crime boss, conducted all of his financial transactions in cash, never having a record of having a bank account. To expand further, the Internal Revenue Service could never find any records of Al Capone purchasing a single security. Despite Capone being behind several casualties during his time spent as the "mafia boss", the federal government was unable to connect any evidence to him. Having said this, the government put a great deal of effort toward collecting evidence of Capone neglecting to pay taxes on his income. Capone was charged with 22 counts of tax evasion but later found guilty of five tax evasion charges (Krishna, 2008; "Al Capone: Biography", 2012). Following Capone's sentencing, Meyer Lansky, often called "The Mob's Accountant", worked to find a better way to get out of paying taxes. Moving forward, Lansky discovered the benefits of Swiss Bank accounts and would become a significant figure for money laundering by using foreign tax havens. Occurrence Nearly all Americans believe that cheating on taxes is morally and ethically unacceptable. The voluntary compliance rate (a technical measurement of taxes being paid both on time and voluntarily) in the US is generally around 81 to 84%. This is one of the highest rates in the world. By contrast, Germany's voluntary compliance rate is 68%, and Italy's is 62%.
The Internal Revenue Service (IRS) provides formal definitions: "The gross tax gap is the difference between true tax liability for a given tax year and the amount that is paid on time. It is the nonfiling gap, the underreporting gap, and the underpayment (or remittance) gap. The net tax gap is the portion of the gross tax gap that will never be recovered through enforcement or other late payments."
The IRS has identified small business and sole proprietorship employees as the most significant contributors to the tax gap between what Americans owe in federal taxes and what the federal government receives. Small business and sole proprietorship employees contribute to the tax gap because there are few ways for the government to know about the skimming or non-reporting of income without mounting more significant investigations.
The willful failures to report tips, income from side-jobs, other cash receipts, and barter income items are examples of illegal cheating. Similarly, those self-employed persons (or those who run small businesses) evade the assessment or payment of taxes if they intentionally fail to report income. One study suggested that the fact that sharing economy firms like Airbnb, Lyft, and Etsy do not file 1099-K forms when participants earn less than $20,000 and have fewer than 200 transactions, results in significant unreported income. A recent survey found that the amount of unreported income for 2016 in the United States numbered at US $214.6 billion, with one in four Americans not reporting the money made on side-jobs.
The typical tax evader in the United States is a male under the age of 50 in a high tax bracket and with a complicated return, and the most common means of tax evasion is the overstatement of charitable contributions, particularly church donations.
Foreign tax havens
Jurisdictions that allow for limited taxation, known as tax havens, may be used to legally avoid taxes and illegally evade taxes. People can utilize tax havens because many other foreign financial institutions are not held to the same disclosure requirements as those in the United States. This allows people to hide money with the benefit of not needing to provide access to tax information that is required in the United States but not in the tax haven country. Due to laws put in place in tax havens that limit the amount of information to be shared with the United States the overall amount of tax evasion due to tax havens are not able to be reliably estimated. In 2010, the Foreign Account Tax Compliance Act was passed to better enforce taxation in foreign jurisdictions.
Illegal income
U.S. citizens are required to report unlawful gains as income when filing annual tax returns (see e.g., James v. United States366 U.S. 213 (1961), "overruling" Commissioner v. Wilcox, 327 U.S. 404 (1946).) although such income is typically not reported. Suspected lawbreakers, most famously Al Capone, have been successfully prosecuted for tax evasion when there was insufficient evidence to try them for their non-tax-related crimes. Reporting illegal income as earned legitimately may be unlawful money laundering.
Bogus deductions A major type of criminal tax evasion in the United States involves filing false deductions, or deductions for expenses that were never incurred, to lessen the tax penalty.
Influencing factors
Imposition of penalties There are two ways penalties on tax evasion are imposed. These penalties can be imposed on undeclared income or evaded tax. Relationships exist between tax rates and tax evasion. An increase in the tax rate will affect tax evasion differently depending on how the penalty is imposed. If the penalty is imposed on undeclared income, there will be a higher rate of tax evasion. If the penalty is imposed on the evaded tax, then the rate of tax evasion can either increase or decrease. The increase or decrease in tax evasion when the penalty is imposed on evaded tax depends on the magnitude of income.
Ethical viewpoint A person's ethics can play a big role in committing tax evasion. A person who views the correct representation of income and proper filing of taxes as an ethical decision will lead to more compliance with the tax codes and regulations. A person who does not view the correct representation of income and proper filing of taxes as an ethical decision is more likely to be influenced by factors surrounding them. For example, suppose a family is behind on rent, and the taxpayer does not view properly filling out their taxes as an ethical decision. In that case, they use that outside event to justify evading taxes.
Robert McGee explains the ethics surrounding the act of tax evasion as the "compulsory taking of property by government" (McGee 1994). In simplistic form, taxation represents citizens paying a portion of their income to the government, followed by the government using such funds for external purposes. Whether it be for education, law enforcement, or public parks, each situation shares in the relation of the government receiving money, so-called "property" from the taxpayer. Moving forward, the notion of taxation being "compulsory" stems from the evasion of paying one's taxes, which is illegal. Hence, the government would punish those who engage in tax evasion. Due to the following, tax evasion is seen as unethical because there is no other option but to pay taxes.