Tax Evasion

5paisa Research Team Date: 21 Nov, 2023 05:11 PM IST


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Tax evasion happens to be an illegal activity whereby an entity or individual purposely avoids paying the true tax liability. Ones caught evading their taxes will be subject to criminal charges & considerable tax penalties. It is a federal offence to intentionally fail to pay taxes under the IRS (or internal revenue service) tax code. Welcome to this post that will discuss the ins and outs of tax evasion definition and examples.

What is Tax Evasion?

Tax evasion is an illegal act applicable to nonpayment or underpayment of taxes. According to the tax evasion definition, This act is all about hiding the income or false income without proof of inflating deductions or failure to report cash transactions.

Even when a taxpayer does not submit tax forms, the IRS may determine whether the taxes were owned depending on the information sent in by a third party. Usually, an individual is not proven to be guilty of the act until and unless the failure to pay the tax is considered intentional.

Understanding Tax Evasion

Tax planning includes optimal use of tax deductions, exemptions, income planning, expenditures, allowances, and rebates to lower the overall tax liability considering a financial year.

The best examples of tax deductions are investments that fall under Section 80C – NPS or National Pension Scheme and PPF or Public Provident Fund. On the same note, the act of income tax allows exemptions for a few allowances like LTA or leave travel allowance and HRA or house rent allowance.

Contrarily, it is the unlawful practice where individuals or companies take advantage of mismatches and gaps in tax rules. The prime intention is to lower or prevent tax liability. This practice goes against the tax rules. But as it is not well-defined in tax law, some companies channel their funds via offshore branches to refrain from paying taxes in their home nation.

Any failure to pay taxes may contribute to criminal charges. For charges to get levied, the failure to pay taxes should be proved to be an intentional act from the taxpayer's end.

An individual can be liable to pay for taxes that were left unpaid before. In addition, if they are guilty of official charges, they might be penalised too. The IRS penalties include five years of jail, a $250,000 fine for individuals and $500,000 for companies.

Common Methods of Tax Evasion

One can follow two aspects of avoiding paying their taxes even when they are due. The first is tax avoidance, while the other is tax evasion. The difference between these two is that the prior one is when you are found in a loophole exempting you from paying the tax amount.

Note that it is not illegal. But if you are practising tax evasion, it might lead to penalties as it's illegal. Here's presenting the most common ways how individuals and corporations practise tax evasion:

●    Not paying the Due Amount
The simplest and most common way when someone evades taxes is by this process. What they do is simply avoid paying the amount to the government, not even when their dues are called for. An individual who is engaged in such an act of tax evasion does not pay the tax after or before the date.

●    Submitting false tax returns
In a few cases, when an individual files taxes, they submit incorrect or false information. They do so to lessen the tax or avoid paying the whole amount. It's a method of tax evasion because complete information isn't offered. In addition, they pay less than they are supposed to.

●    Smuggling
The next method is smuggling, where certain goods are transacted from one place to another around the state or international borders. Here the tax might be payable to move goods. Thus, individuals might move the goods in surreptitious methods. That way, they can evade tax.

●    Use of Fake Documents for Claiming Exemption
The government might have offered a few exemptions & privileges to a few members of society to ensure they get financial freedom to progress positively. However, in a few cases, members who do not qualify for the privileges create fake documents. These documents support the claim that states they are not a part of the group, so they can claim exemptions where they aren't suited.

●    Incorrect Financial Statements
Payable taxes by an organisation or person might be decided on a financial dealing that occurs during an assessment year. If any false account book or documents gets submitted, including the income that shows less, the overall tax comes down.

●    Hiding the Income Amount
Failure to report the income amount is one of the most common ways of evading tax. In this method, individuals do not report their income statement received during one financial year. So, if they do not report any income, they simply don't get into the liability of paying tax.

The best example of such a method is giving private tuition but not informing the authorities about the income. Or take the rental acts, for example, where a landlord keeps tenants but doesn't inform the authorities about renting the apartment.

●    Keeping Wealth Outside the Home Country
Did you know offshore accounts are maintained outside your home country? More importantly, the income tax department doesn't disclose information about dealing in such accounts. That way, someone can evade taxes considering their wealth or black money.

●    Bribery
There might be a scenario where a certain amount is due in taxes that an individual might be unwilling to pay. In these circumstances, they might offer a bribe to the officials to not make them pay taxes. In other words, it's known as bribery.

While determining whether the act of failure to pay the tax was purposeful, different parameters come into consideration. The most important of all is the taxpayer's financial scenario examined to confirm whether the nonpayment resulted from the Concealment of income or fraud. This results in tax fraud.

The act of evading taxes might be judged fraudulent in cases where the taxpayer concealed assets. They simply associate them with an individual rather than themselves. So, this act may report income under a false name. As a result, it constitutes identity theft.

An individual might be judged as concealing income for failure, reporting work that didn't follow the old-school payment recording method. That might include the acceptance of any cash payment for services or goods rendered without reporting them to an IRS during the tax filing.

Difference between Tax Planning, Tax Avoidance and Tax Evasion

Want to know the tax evasion vs tax avoidance differences? Tabulated below is the list of differences between tax planning, tax evasion, and tax avoidance:

Differentiating Factors

Tax Planning

Tax Evasion

Tax Avoidance

Definition of the Terms

It reduces tax liability via provisions in tax laws, including credits, deductions, exemptions, and rebates

This method is illegal and intentional to reduce taxes.

In this method, taxpayers reduce their tax liabilities within the law limits, but they perform it in an unacceptable manner

Best Tax Evasion Examples:

It invests in tax-saving instruments, including fixed deposits, tax-saving mutual funds, and more

Tax evasion invests in tax-saving instruments, like the tax-saving mutual fund or even fixed deposit

When the discussion is about tax avoidance, taxpayers invest in tax-saving instruments like the tax-saving mutual fund or even a fixed deposit

Penalties and Consequences

Does not include any fines or penalties

Criminal prosecution, imprisonment, or/and fines

Does not include any fines or penalties

What's the Purpose?

It intends to minimise tax liability within legal bounds

It aims to avoid payment of taxes

Its prime purpose is to reduce tax liability within legal bounds


It is ethical and legal

It is unethical and illegal

It is legal but not ethical

Penalties for Tax Evasion

Here's noting down the tax evasion penalties for specific times and acts of evading income tax via tax evasion:
When the assessee is proven to be the defaulting person, an officer imposes a penalty amount. The penalty for not making the payment is solely at the assessing officer's discretion. When the taxpayer offers justified reasons for the delay in tax payment, the assessing officer might exempt that assessee from tax evasion penalties.

A notice will be sent to taxpayers for tax payment, and they need to pay the amount within 30 days. Failure to make this payment incurs more penal provisions.

There are times when a taxpayer tries to conceal his original income. In that case, the penalty will be between 100% and 300% of the overall tax evaded. Did you know the income tax authorities might feel the necessity to raid a premise? By doing so, they discover a taxpayer's undisclosed income. If the taxpayer doesn't disclose the amount to the officer, and it is later discovered, a 20% penalty will be charged.

Suppose the income return isn't furnished in complete compliance with relevant provisions. In that case, the assessing officer penalises a taxpayer with an amount of Rs. 5000. If a taxpayer does not get the account audited under Section 44AB, a penalty incurred will be one and half the percent of the total sales – either gross receipts' turnover or Rs 1,50,000, the one which is more.

When a taxpayer doesn't present the report made by an accountant under Section 92E, a penalty of more than or equal to Rs 1,00,000 might be charged.

Taxpayers should have documents for each international or domestic transaction. Failure to show such documents under Section 92(D)3 might charge a penalty of 2% of the transaction value.

Failing to retain documents and information for domestic or international transactions attracts around a 2% penalty.

Believe it or disagree with it – tax evasion is a severe crime in a nation like India. So, every taxpayer should avoid evading tax at any cost. Did you know that innumerable attempts to evade tax may lead to severe punishments? So, please pay extra attention to the income tax details. File the returns on time & ensure you follow the rules & regulations as per the Government of India.

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Frequently Asked Questions

If someone fails to file the ITR or income tax returns before or on the due date, you need to pay interest of 1%. Note that you must pay the interest for every month or part of a single month on the amount of tax unpaid according to section 234A. But keep in mind that you cannot file your ITR if you do not pay the taxes.

No, a taxpayer is responsible for ensuring the tax credits are available in the tax credit statement. You also need to show that you have received the TCS or TDS certificates. Also, you must show that the complete tax payment and income particulars are submitted to the Department of income tax via Return of Income.

Note that capital receipts are taxable under some conditions. They are taxable only when capital assets transfer, where they get taxed as capital gains. Suppose there's no transfer of assets. In such a scenario, the capital receipts will not be subject to any tax.

If you do not comply with the Notice, a penalty will get imposed of approximately Rs. 10,000. The case may fall under the best judgement assessment, which is carried out according to the Assessing Officer's best judgement based on relevant information gathered.

Tax planning involves reducing tax liability via provisions in tax laws. This includes credits, exemptions, rebates, and deductions. It does not include any fine or penalty. On the contrary, tax evasion is illegal and intentional to reduce taxes. It includes imprisonment, fines, and/or criminal prosecution.

And tax avoidance is the method where taxpayers reduce tax liabilities within a law limit, although they perform it in an unacceptable manner. This act doesn't include penalties or fines.