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Tax Evasion: Methods of Tax Evasion
Tax Evasion
An illegal practice where a person, organization or corporation intentionally avoids paying his/her/its true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties. Tax evasion is the way of reducing tax liability by illegal unethical and uneconomical. It is illegal because the law does permit to evade the tax. It is unethical because the activity of not paying tax is against moral ethics. In the same way it is uneconomic because it promotes black money, underground economy in a country.
The term ‘Tax Evasion’ refers to avoiding tax by adopting dishonest means. It is the way of reducing tax by illegal means. “Action by which the taxpayer which entails breaking the law and which more over can be shown to have been taken with the intention of escaping payment of tax” is regarded as evasion. Tax evasion is done through different ways: (Kandel, P.R., 2007pp,326-327).
- Non- reporting of income
- Under reporting of income
- Making fraudulent changes in account books
- Maintaining multiple sets of accounts
- Operating business transactions under different names
- Opening bank account in dummy name
- Over- reporting of expenses
- Fragmentation of incomes
- Transfer pricing etc
There is a different between tax minimization/avoidance and tax evasion. All citizens have the right to reduce the amount of taxes they pay as long as it is by legal means: explain by investopedia.
Reduction or elimination of tax liability through country to law avoiding tax by adopting dishonest means-illegal. Tax evasion in unethical, illegal and uneconomic activity. It is unethical because the activity of not paying tax is against moral ethics. It is illegal because the law does not permit to evade the tax. In the same way, it is uneconomic because it promotes black money, i.e. underground economy in a country. Such types of activities do not promote healthy economy in a country. Such types of activities do not promote healthy economy in a country.
Basically, the reasons of tax evasion can be divided into two- non-tax factors and tax factors. Non-tax factors include educational background, price policies of the government, government rules and regulations, public sectors salaries, government’s expenditure policy and others. Tax factors include tax rate, tax base, tax structure, penalty system, probability of detection, magnitude of the strictness of penalty and possibility of applying penalty if evasion is detected. Mainly, tax factors are more concerned with the tax evasion on income from illegal activities, whereas non-tax factors are related with illegal activities.
Basically, there are three of effects of tax evasion in the economy. They are:
- Loss of revenue to the state.
- Redistribution of income which affect the efficiency of resource allocation in the economy.
- Creating wrong statistics leading to errors in government policies.
Evasion of income tax is also associated with the evasion of sales tax, excise duty, customs duty and so on. Since the government imposes higher tax rate to fulfill the growing need of the revenue, it is the honest taxpayers that really bear the burden of tax.
Tax evasion is a major problem to the government in developing countries. There are several types of tax evasion:
- Unilateral: It is evasion of tax payer by himself.
- Bilateral: It is evasion of tax with the assistance of tax officials.
- Trilateral: It is evasion of tax from the collusion of tax auditors and tax payers.
- Multilateral: It is evasion of tax from all parties involved from government to tax payers.
Tax evasion is an illegal work so it has to be panelized by court. Failure to submit income statement at office and failure to make payment of taxes because negligence is also regarded as tax evasion (United Nation, 1984).
Methods of Tax Evasion
Most of the Methods for tax evasion are as follows: (Dr. Dhakal, KD., 2008p,55& Panda, D.P., 1985pp,98-102).
- Over-reporting of expenses
- Incorrect claim for allowances and deductions
- Over and under invoicing
- Concealment of a sources of income
- Not maintaining proper accounts of income earned
- Maintaining multiple sets of accounts
- Stating an untrue statement knowingly
- Submitting misleading documents
- Misrepresentation of facts and information’s
- Omission of material facts
- operating business transaction under different names