Page 69 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes 3.3 Tax Evasion

Tax evasion as the term implies refers to the phenomenon of evading tax. Tax evasion is the
general term for efforts by individuals, firms, trusts and other entities to evade taxes by illegal

means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true
state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular,

dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or
overstating deductions).

Example: Some entities collect revenue in cash and do not record the same. The logic
behind not disclosing the true income is to avoid paying taxes on the non-recorded income. This
example is a clear example of tax evasion and is an illegal act. Tax avoidance on the other hand is
a legal activity.
Tax evasion is usually understood to be an act in which an individual intentionally chooses to
not pay income taxes due. This act of not paying taxes may be conducted by simply chooses to

not file an income tax return, or choosing to not include information about taxable income on the

filed return. In all instances, tax evasion can be considered to be fraud, and usually carries stiff
penalties.
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Caution Tax evasion is illegal, so those engaging in it have every reason to seek to conceal
what they are doing. This introduces a fundamental difficulty into the measurement of tax

evasion. Even so, the fact that the estimates that are available show evasion constitute a
significant part of total economic activity underlines the importance of measurement. The

lost revenue due to tax evasion also emphasises the value of developing a theory of evasion
that can be used to design a tax structure that minimises evasion and ensures that policy is
optimal given evasion occurs.
While there are some that consider any type of omission from the tax return to constitute tax
evasion, it is important to remember that it is possible to omit an item simply because the data

was overlooked when filing the return. Thus, the intent of the individual plays a key role in
determining if tax evasion has taken place. When the return fails to include information simply
because the filer overlooked the data, there is a good chance that the tax agency will still impose

a fine of some sort, but no further action would be taken.
However, when it can be demonstrated that the individual wilfully attempted to hide information
about income that was subject to withholding, the tax agency may choose to impose more than a
simple interest fine on the amount omitted. The filer may be subject to stiff fines associated with

the deliberate failure to fi le an accurate tax return, or even possibly face prosecution and some
time spent in jail for the intentional negligence.

Tax evasion is considered a crime, and is often classified as fraud. All citizens suffer from tax
evasion, as the act prevents the government from collecting funds to use for the operation of
essential services to the population. When these funds are not collected, services have to be
curtailed and thus result in a lower quality of life for all citizens.
Persons who become aware of an error on calculating taxes on reported income or notice that
income was inadvertently left off the tax return for a given period should contact the tax agency
and make arrangements to file an amended return as soon as possible. This will help to minimise

the chances of being suspected of tax evasion, and allow the matter to be settled before interest
charges become signifi cant.

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