What is tax evasion? Definition and meaning

Tax Evasion is the unlawful non-payment or underpayment of tax by individuals, companies and other entities. If a person or a company evades taxes, they risk being in trouble with the tax authorities, such as the Inland Revenue Service (IRS) in the United States, Her Majesty’s Revenue and Customs (HMRC) in the UK, the Canada Revenue Agency (CRA), the Australian Taxation Office (ATO), and the Office of the Revenue Commissioners in the Republic of Ireland.

Tax evasion contrasts with tax avoidance, which refers to the legal methods that people and companies use to minimize their tax bill.

Any willful non-payment of taxes due, deliberate under-statement of taxable income to the tax authorities, inflating deductions, or hiding money could be considered as tax evasion.

Top tax evasion countries
According to tax campaigner Richard Murphy, total global tax evasion is estimated to amount to 5% of the global economy. (Image: adapted from Wikipedia)

According to the Legal Information Institute, part of Cornell University:

“Tax evasion is using illegal means to avoid paying taxes. Typically, tax evasion schemes involve an individual or corporation misrepresenting their income to the Internal Revenue Service. Misrepresentation may take the form either of underreporting income, inflating deductions, or hiding money and its interest altogether in offshore accounts.”

“The U.S. Government projects that fiscal year 2007 resulted in the government losing $345 billion because of tax evasion.”

Tax evasion and criminal activity

People who have earned money from criminal activity frequently engage in tax evasion because they cannot report their true income – and how they earned that income – to the tax authorities. If they did, they would probably be arrested.

Sometimes, criminals who try to report those earnings as coming from lawful sources risk being charged with money laundering.

Quote from accountingweb.com: “Is there a difference between tax avoidance and tax evasion? Sure there is, but the difference is not academic. Whereas evasion is a criminal offense, avoidance is perfectly legal.”

In virtually every country in the world, tax evasion is a crime that may give rise to hefty financial penalties, imprisonment, or both

In the United States, Section 7201 of the Internal Revenue Code has the following warning:

“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.”

Fighting tax evasion

OECD member states have been getting together regularly – in Washington, London, Pittsburgh, Seoul, Toronto and Cannes – to coordinate international tax transparency and fight against cross-border tax evasion. OECD stands for the Organization for Economic Co-operation and Development.

Technology is rapidly becoming an indispensable weapon for tax authorities across the world. Although modern technology can help tax evaders find more sophisticated methods to cheat on their taxes, it can also be an extremely powerful tool for tax authorities to quickly identify such methods.

Several tax authorities have already been extremely successful in detecting and preventing fraud and tax evasion through the use of technology solutions, which has led to the recovery of billions of dollars and euros in tax revenue, according to a new report – Technology Tools to Tackle Tax Evasion and Tax Fraud – issued by the OECD in March 2017.

Tax Evasion Quote - Kenneth Rogoff
Kenneth Rogoff is an American economist and chess Grandmaster. He is a Professor of Economics and the Thomas D. Cabot Professor of Public Policy at Harvard University. He dropped out of high school to focus on Chess, and won the US Junior championship in 1969 – when he was just 16. (Image: adapted from Wikipedia)

Reporting tax evasion

Most governments encourage their citizens to report suspected cases of tax evasion.

  • United States

In the United States, the IRS asks people to use Form 3949-A if they suspect or know of a business or individual that is not complying with the country’s tax laws on issues such as:

  • Kickbacks
  • False Exemptions or Deductions
  • Organized Crime
  • Failure to Pay tax
  • Unreported Income
  • False/Altered Document
  • Failure to Withhold
George Papandreou - Tax Evasion Quote
George Jeffrey Papandreou was Prime Minister of Greece from 2009 to 2011. He was the third member of the Papandreou family to serve as Greece’s Prime Minister. (Image: adapted from alchetron.com)

  • United Kingdom

The British Government has an HMRC Fraud Hotline – an Online Information Report Form.

On its website, it advises people – for their own safety – not to try to find out more about the tax evasion or let other people know that they are making a report.

People may also call this telephone number – 0800 788 887 – or write to the following address regarding information on people or companies engaged in tax evasion: HMRC Fraud Hotline, Cardiff, CF14 5ZN, United Kingdom.

Tax evasion quote - Denis Healey
Denis Winston Healey, Baron Healey (1917-2015) was British Secretary of State for Defense from 1964 to 1970, and Chancellor of the Exchequer from 1974 to 1979. He was a member of the British Parliament for forty years – 1951 to 1992. (Image: adapted from Wikipedia)

  • Canada

The Informant Leads Program reviews and coordinates data provided by members of the public to assist the Canada Revenue Agency in identifying taxpayers who are breaking tax laws.

People can report suspected tax evaders online or by contacting the National Leads Centre: National Leads Centre, Business Intelligence and Quality, Assurance Division, Canada Revenue Agency, 200 Town Centre Court, Scarborough ON M1P 4Y3.

Telephone: 1-866-809-6841. Fax: 1-888-724-4829.

The CRA stresses that an informant’s identity will not be disclosed – in fact, if you want you may provide the information anonymously.

  • Australia

The Australian Taxation Office invites members of the public to submit a report using its online form. You can also lodge an unpaid super enquiry about your employer (not another business).

Letters, marked ‘in confidence’, should be posted to: Australian Taxation Office, Tax Evasion, Locked Bag 6050, DANDENONG VIC 3175.

Telephone: 1800 060 062.

Example sentences

Here are sentences showcasing the use of “tax evasion” or “evading taxes” and “tax avoidance” or “avoiding taxes” to highlight their contexts and differences:

Tax Evasion / Evading Taxes
  1. Tax Evasion: “The company’s CEO was sentenced to five years in prison after being convicted of tax evasion for not reporting millions in overseas income.”
  2. Evading Taxes: “By evading taxes through the use of offshore bank accounts, the wealthy individual faced severe legal penalties upon discovery by the tax authorities.”
  3. Tax Evasion: “Tax evasion schemes often involve underreporting income, inflating deductions, or hiding money in unreported accounts.”
  4. Evading Taxes: “The investigation revealed that the business owner was evading taxes by falsifying expense reports to reduce taxable income.”
Tax Avoidance / Avoiding Taxes
  1. Tax Avoidance: “The corporation engaged in tax avoidance by legally structuring its operations to take advantage of lower tax rates in another country.”
  2. Avoiding Taxes: “Through careful financial planning and legal strategies for avoiding taxes, the investor significantly reduced her tax liability without breaking the law.”
  3. Tax Avoidance: “Tax avoidance strategies, such as contributing to retirement accounts, are widely used and encouraged to minimize taxes within the bounds of the law.”
  4. Avoiding Taxes: “The accountant recommended several methods for avoiding taxes that would align with current regulations and effectively lower the company’s tax burden.”

Tax evasion in other languages: Steuerhinterziehung (German), évasion fiscale (French), evasión de impuestos (Spanish), evasão fiscal (Portuguese), evasione delle tasse (Italian), Уклонение от уплаты налогов (Russian), 脱税 (Japanese), 逃税 (Chinese), التهرب الضريبي (Arabic), and कर की चोरी (Hindi).

Two Videos

These two YouTube videos come from our sister channel, Marketing Business Network or MBN. They explain what the terms “Tax Evasion” and “Tax Avoidance” mean using easy-to-understand language and examples:

  • What is Tax Evasion?

  • What is Tax Avoidance?