Tax evasion

The examples and perspective in this article deal

primarily with Western culture and do not
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Tax evasion is the illegal evasion of taxes

by individuals, corporations, and trusts.
Tax evasion often entails taxpayers
deliberately misrepresenting the true state
of their affairs to the tax authorities to
reduce their tax liability and includes
dishonest tax reporting, such as declaring
less income, profits or gains than the
amounts actually earned, or overstating
deductions.

Tax evasion is an activity commonly

associated with the informal economy.[1]
One measure of the extent of tax evasion
(the "tax gap") is the amount of unreported
income, which is the difference between
the amount of income that should be
reported to the tax authorities and the
actual amount reported.

In contrast, tax avoidance is the legal use

of tax laws to reduce one's tax burden.
Both tax evasion and avoidance can be
viewed as forms of tax noncompliance, as
they describe a range of activities that
intend to subvert a state's tax system,
although such classification of tax
avoidance is not indisputable, given that
avoidance is lawful, within self-creating
systems.[2]

Economics

The ratio of German assets in tax havens in relation to

the total German GDP, 1996–2008.[3] The "Big 7"
shown are Hong Kong, Ireland, Lebanon, Liberia,
Panama, Singapore, and Switzerland.
In 1968, Nobel laureate economist Gary
Becker first theorized the economics of
crime,[4] on the basis of which authors
M.G. Allingham and A. Sandmo produced,
in 1972, an economic model of tax
evasion. This model deals with the evasion
of income tax, the main source of tax
revenue in developed countries. According
to the authors, the level of evasion of
income tax depends on the detection
probability and the level of punishment
provided by law.[5]

The literature's theoretical models are

elegant in their effort to identify the
variables likely to affect non-compliance.
Alternative specifications, however, yield
conflicting results concerning both the
signs and magnitudes of variables
believed to affect tax evasion. Empirical
work is required to resolve the theoretical
ambiguities. Income tax evasion appears
to be positively influenced by the tax rate,
the unemployment rate, the level of
income and dissatisfaction with
government.[6] The U.S. Tax Reform Act of
1986 appears to have reduced tax evasion
in the United States.

In a 2017 study Alstadsæter et al.

concluded based on random stratified
audits and leaked data that occurrence of
tax evasion rises sharply as amount of
wealth rises and that the very richest are
about 10 times more likely than average
people to engage in tax evasion.[7]

Evasion of customs duty

Customs duties are an important source
of revenue in developing countries.
Importers attempt to evade customs duty
by (a) under-invoicing and (b)
misdeclaration of quantity and product-
description. When there is ad valorem
import duty, the tax base can be reduced
through under-invoicing. Misdeclaration of
quantity is more relevant for products with
specific duty. Production description is
changed to match a H. S. Code
commensurate with a lower rate of duty.[8]

Smuggling …

Smuggling is import or export of products

by illegal means. Smuggling is resorted to
for total evasion of customs duties, as well
as for the import and export of
contraband. Smugglers do not pay duty
since the transport is covert, so no
customs declaration is made.[8]

Evasion of value-added tax

(VAT) and sales taxes
Tax campaigner Richard Murphy's estimate of the ten
countries with the largest absolute levels of tax
evasion. He estimated that global tax evasion
amounts to 5 percent of the global economy.[9]

During the second half of the 20th century,

value-added tax (VAT) emerged as a
modern form of consumption tax
throughout the world, with the notable
exception of the United States. Producers
who collect VAT from consumers may
evade tax by under-reporting the amount
of sales.[10] The US has no broad-based
consumption tax at the federal level, and
no state currently collects VAT; the
overwhelming majority of states instead
collect sales taxes. Canada uses both a
VAT at the federal level (the Goods and
Services Tax) and sales taxes at the
provincial level; some provinces have a
single tax combining both forms.

In addition, most jurisdictions which levy a

VAT or sales tax also legally require their
residents to report and pay the tax on
items purchased in another jurisdiction.
This means that consumers who purchase
something in a lower-taxed or untaxed
jurisdiction with the intention of avoiding
VAT or sales tax in their home jurisdiction
are technically breaking the law in most
cases.

This is especially prevalent in federal

countries like the US and Canada where
sub-national jurisdictions charge varying
rates of VAT or sales tax.

In liberal democracies, a fundamental

problem with inhibiting evasion of local
sales taxes is that liberal democracies, by
their very nature, have few (if any) border
controls between their internal
jurisdictions. Therefore, it is not generally
cost-effective to enforce tax collection on
low-value goods carried in private vehicles
from one jurisdiction to another with a
different tax rate. However, sub-national
governments will normally seek to collect
sales tax on high-value items such as
cars.[11]

Dennis Kozlowski is a particularly notable

figure for his alleged evasion of sales tax.
What started as an investigation into
Kozlowski's failure to declare art
purchases for the purpose of evading New
York state sales taxes eventually led to
Kozlowski's conviction and incarceration
on more serious charges related to the
misappropriation of funds during his
tenure as CEO of Tyco International.

Government response
The size of the shadow economy in Europe, 2011.

The level of evasion depends on a number

of factors, including the amount of money
a person or a corporation possesses.
Efforts to evade income tax decline when
the amounts involved are lower. The level
of evasion also depends on the efficiency
of the tax administration. Corruption by tax
officials make it difficult to control evasion.
Tax administrations use various means to
reduce evasion and increase the level of
enforcement: for example, privatization of
tax enforcement[8] or tax farming.[12][13]

In 2011 HMRC, the UK tax collection

agency, stated that it would continue to
crack down on tax evasion, with the goal
of collecting £18 billion in revenue before
2015. In 2010, HMRC began a voluntary
amnesty program that targeted middle-
class professionals and raised £500
million.[14]

Corruption by tax officials …

Corrupt tax officials co-operate with the

taxpayers who intend to evade taxes.
When they detect an instance of evasion,
they refrain from reporting it in return for
bribes. Corruption by tax officials is a
serious problem for the tax administration
in many less developed countries.

Level of evasion and punishment …

Tax evasion is a crime in almost all
developed countries, and the guilty party is
liable to fines and/or imprisonment. In
Switzerland, many acts that would amount
to criminal tax evasion in other countries
are treated as civil matters. Dishonestly
misreporting income in a tax return is not
necessarily considered a crime. Such
matters are handled in the Swiss tax
courts, not the criminal courts.

In Switzerland, however, some tax

misconduct (such as the deliberate
falsification of records) is criminal.
Moreover, civil tax transgressions may give
rise to penalties. It is often considered that
the extent of evasion depends on the
severity of punishment for evasion.

Privatization of tax enforcement …

A "Lion's Mouth" postbox for anonymous

denunciations at the Doge's Palace in Venice, Italy.
Text translation: "Secret denunciations against anyone
who will conceal favors and services or will collude to
hide the true revenue from them."
Professor Christopher Hood first
suggested privatization of tax
enforcement to control tax evasion more
efficiently than a government department
would.,[15] and some governments have
adopted this approach. In Bangladesh,
customs administration was partly
privatized in 1991.[8]

Abuse by private tax collectors (see tax

farming below) has on occasion led to
revolutionary overthrow of governments
who have outsourced tax administration.

Tax farming …
Tax farming is an historical means of
collection of revenue. Governments
received a lump sum in advance from a
private entity, which then collects and
retains the revenue and bears the risk of
evasion by the taxpayers. It has been
suggested that tax farming may reduce
tax evasion in less developed countries.[12]

This system may be liable to abuse by the

"tax-farmers" seeking to make a profit, if
they are not subject to political
constraints. Abuses by tax farmers
(together with a tax system that exempted
the aristocracy) were a primary reason for
the French Revolution that toppled Louis
XVI.

PSI agencies …

Pre-shipment inspection agencies like

Société Générale De Surveillance S. A. and
its subsidiary Cotecna are in business to
prevent evasion of customs duty through
under-invoicing and misdeclaration.

However, PSI agencies have cooperated

with importers in evading customs duties.
Bangladeshi authorities found Cotecna
guilty of complicity with importers for
evasion of customs duties on a huge
scale.[16] In August 2005, Bangladesh had
hired four PSI companies – Cotecna
Inspection SA, SGS (Bangladesh) Limited,
Bureau Veritas BIVAC (Bangladesh)
Limited and INtertek Testing Limited – for
three years to certify price, quality and
quantity of imported goods. In March
2008, the Bangladeshi National Board of
Revenue cancelled Cotecna's certificate
for serious irregularities, while importers'
complaints about the other three PSI
companies mounted. Bangladesh planned
to have its customs department train its
officials in "WTO valuation, trade policy,
ASYCUDA system, risk management" to
take over the inspections.[17]
Cotecna was also found to have bribed
Pakistan's prime minister Benazir Bhutto
to secure a PSI contract by Pakistani
importers. She and her husband were
sentenced both in Pakistan and
Switzerland.[18]

By continent

Europe …

Germany, France, Italy, Denmark,

Belgium …

A network of banks, stock traders and top

lawyers has obtained billions from the
European treasuries through suspected
fraud and speculation with dividend tax.
The five hardest hit countries have lost
together at least $62.9 billion.[19] Germany
is the hardest hit country, with around €31
billion withdrawn from the German
treasury.[20] Estimated losses for other
countries include at least €17 billion for
France, €4.5 billion in Italy, €1.7 billion in
Denmark and €201 million for
Belgium.[21][22][23]

Greece …

Scandinavia …

A paper by economists Annette

Alstadsæter, Niels Johannesen and
Gabriel Zucman, which used data from
HSBC Switzerland (“Swiss leaks”) and
Mossack Fonseca (“Panama Papers”),
found that "on average about 3% of
personal taxes are evaded in Scandinavia,
but this figure rises to about 30% in the top
0.01% of the wealth distribution... Taking
tax evasion into account increases the rise
in inequality seen in tax data since the
1970s markedly, highlighting the need to
move beyond tax data to capture income
and wealth at the top, even in countries
where tax compliance is generally high.
We also find that after reducing tax
evasion—by using tax amnesties—tax
evaders do not legally avoid taxes more.
This result suggests that fighting tax
evasion can be an effective way to collect
more tax revenue from the ultra-
wealthy."[24]

United Kingdom …

Poster issued by the British tax authorities to counter

offshore tax evasion.
HMRC, the UK tax collection agency,
estimated that in the tax year 2016–17,
pure tax evasion (i.e. not including things
like hidden economy or criminal activity)
cost the government £5.3 billion. This
compared to a wider tax gap (the
difference between the amount of tax that
should, in theory, be collected by HMRC,
against what is actually collected) of £33
billion in the same year, an amount that
represented 5.7% of liabilities. At the same
time, tax avoidance was estimated at £1.7
billion (this does not include international
tax arrangements that cannot be
challenged under the UK law, including
some forms of base erosion and profit
shifting (BEPS)).[25]

In 2013, the Coalition government

announced a crackdown on economic
crime. It created a new criminal offence
for aiding tax evasion and removed the
requirement for tax investigation
authorities to prove "intent to evade tax" to
prosecute offenders.[26]

In 2015, Chancellor George Osborne

promised to collect £5bn by "waging war"
on tax evaders by announcing new powers
for HMRC to target people with offshore
bank accounts.[27] The number of people
prosecuted for tax evasion doubled in
2014/15 from the year before to 1,258.[28]

United States …

In the United States of America, Federal

tax evasion is defined as the purposeful,
illegal attempt to evade the assessment or
the payment of a tax imposed by federal
law. Conviction of tax evasion may result
in fines and imprisonment.[29]

The Internal Revenue Service (IRS) has

identified small businesses and sole
proprietors as the largest contributors to
the tax gap between what Americans owe
in federal taxes and what the federal
government receives. Small businesses
and sole proprietorships contribute to the
tax gap because there are few ways for
the government to know about skimming
or non-reporting of income without
mounting significant investigations.

As of 2007 the most common means of

tax evasion was overstatement of
charitable contributions, particularly
church donations.[30]

Estimates of lost government revenue …

The IRS estimates that the 2001 tax gap

was $345 billion and for 2006 it was $450
billion.[31] A study of the 2008 tax gap
found a range of $450–$500 billion, and
unreported income to be about $2 trillion,
concluding that 18 to 19 percent of total
reportable income was not being properly
reported to the IRS.[6]

See also
Global Forum on Transparency and
Exchange of Information for Tax
Purposes
History of tax resistance
Informal sector
Land value tax
Panama Papers
 Social inequality
Tax amnesty
Tax avoidance
Tax haven
Tax information exchange agreements
Tax noncompliance
Tax resistance
Taxation as slavery
Taxation as theft
Unreported employment
U.S. taxation of illegal income

Further reading
 Slemrod, Joel. 2019. "Tax Compliance
and Enforcement." Journal of Economic
Literature, 57 (4): 904-54.

References
1. Tax Evasion & Whistleblowers: Curious
Policy or Durable Strategy? Tax Law:
International & Comparative Tax
eJournal. SSRN. Accessed 5 May
2020.
2. Michael Wenzel (2002). "The Impact of
Outcome Orientation and Justice
Concerns on Tax Compliance" (PDF).
Journal of Applied Psychology: 4–5.
"When taxpayers try to find loopholes
with the intention to pay less tax, even
 if technically legal, their actions may
be against the spirit of the law and in
this sense considered noncompliant."
3. Hebous, Shafik (2011). "Money at the
Docks of Tax Havens: A Guide". CESifo
Working Paper Series. 70 (3587): 9.
doi:10.1628/001522114X684547 .
hdl:10419/52472 . SSRN 1934164 .
4. Gary Becker (1968). "Crime and
Punishment: An Economic Approach"
(PDF). The Journal of Political
Economy. 76 (2): 169–217.
doi:10.1086/259394 .
5. Allingham, M. G. and A. Sandmo
[1972] ‘Income Tax evasion: A
 Theoretical Analysis’, Journal of Public
Economics, Vol. 1, 1972, pp. 323–38.
. Cebula, Richard; Feige, Edgar L. (n.d.).
"America's Underground Economy:
Measuring the Size, Growth and
Determinants of Income Tax Evasion
in the U.S" . Ideas.repec.org.
7. Alstadsæter et al. 2017. Tax Evasion
and Inequality∗
. Chowdhury, F. L. (1992) Evasion of
Customs Duty in Bangladesh,
unpublished MBA dissertation,
Graduate School of Management,
Monash University, Australia.
 9. David Cay Johnston (13 December
2011). "Where's the fraud, Mr.
President?" . Reuters.
10. Spiro, Peter S. (2005), "Tax Policy and
the Underground Economy," in
Christopher Bajada and Friedrich
Schneider, eds., Size, Causes and
Consequences of the Underground
Economy (Ashgate Publishing).
11. Tomášková, Eva (2008). "Tax Evasion
in the Czech Republic – In: A Brief
Introduction to Czech Law. Rincon:
The American Institute for Central
European Legal Studies (AICELS)
2008. pp. 111–21 ISBN 978-0-692-
 00045-8" (PDF). Archived from the
original (PDF) on September 3, 2011.
12. Stella, Peter (1993). "Tax Farming: A
Radical Solution for Developing
Country Tax Problems?". IMF Staff
Papers. 40 (1): 217–25.
doi:10.2307/3867383 .
JSTOR 3867383 .
13. Alam. D (1999) Introduction of PSI
system in Bangladesh: Facts and
Documents, Desh Prokashon, Dhaka.
14. Russell, Jonathan (June 10, 2011).
"HMRC opens 16 criminal cases over
tax evasion" . The Telegraph. London:
 telegraph.co.uk. Retrieved August 12,
2011.
15. Hood, C. (1986) Privatizing UK tax Law
Enforcement?, Public Administration,
Vol. 64, Autumn, 1986, p. 319–33.
1 . "NBR showcauses Cotecna on car
import scam" . New Age. Dhaka:
Media New Age Ltd. 14 September
2007. Archived from the original on
November 20, 2010.
17. "PSI system likely to continue" .
Bangladesh News. 3 May 2008.
Archived from the original on May 11,
2008. Retrieved 3 January 2015.
1 . Langley, Alison (6 August 2003).
"Pakistan: Bhutto Sentenced In
Switzerland" . New York Times.
19. "CORRECTIV - Investigative.
Independent. Non-profit" . cumex-
files.com. Retrieved 2018-11-09.
20. Hill, Jenny (2017-06-09). "Germany
fears huge losses in massive tax
scandal" . BBC News. Retrieved
2018-11-09.
21. "Kuppet mod Europa" . DR (in Danish).
Retrieved 2018-11-09.
22. Vartdal, Ragnhild. "Norge rammet av
europeisk skatteskandale" [Norway
affected by European tax scandal].
 NRK (in Norwegian Bokmål). Retrieved
2018-11-09.
23. magazine, Le Point (2018-10-18).
" "CumEx Files " : la fraude fiscale à 55
milliards d'euros" ["CumEx Files": tax
fraud at 55 billion euros]. Le Point (in
French). Retrieved 2018-11-09.
24. Alstadsæter, Annette; Johannesen,
Niels; Zucman, Gabriel (23 October
2018). "Tax Evasion and Inequality"
(PDF). gabriel-zucman.eu.

25. "Measuring tax gaps 2018 edition"

(PDF). HM Revenue & Customs. 14
June 2018.
2 . "UK government announces corporate
tax evasion clampdown" . BBC News.
19 March 2015.
27. "George Osborne wages war on tax
evasion and avoidance" . Channel 4
News. 19 March 2015.
2 . Ames, Jonathan; Gibb, Frances (14
December 2015). "Lawyers and
tradesmen caught in tax clampdown" .
29. 26 U.S.C. § 7201.
30. Sabatini, Patricia (25 March 2007).
"Tax Cheats Cost U.S. hundreds of
billions" . Pittsburgh Post-Gazette.
31. "Tax Gap for Tax Year 2006 Overview
Jan. 6, 2012" (PDF). U.S. Internal
 Revenue Service. Retrieved
2012-06-14.

External links

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related to Tax evasion.

Tax Evasion and Fraud collected news

and commentary at The Economist
"Tax Evasion collected news and
commentary" . The New York Times.
Employment Tax Evasion Schemes
common employment schemes at IRS
United States
 US Justice Dept press release on
Jeffrey Chernick, UBS tax evader
US Justice Tax Division and its
enforcement efforts

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