Tax evasion
Encyclopedia
Tax evasion is the general term for efforts by individuals, corporation
s, trusts and other entities to evade tax
es 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). Tax evasion is an activity commonly associated with the underground economy and one measure of the extent of tax evasion the amount of unreported income, namely the difference between the amount of income that should legally be reported to the tax authorities and the actual amount reported. In the 1970's and 80's, The IRS undertook the Taxpayer Compliance Measurement Program (TCMP) in an attempt to measure unreported income and the tax gap. The tax gap is the difference between the amount of tax legally owed and the amount actually collected by the government. The TCMP program was believed to produce the most reliable information about noncompliance, but these "audits from hell" were deemed to be overly intrusive and were discontinued in 1988. The National Research Program was undertaken in the 1990's as a less intrusive means of measuring noncompliance and was described as "the most careful and comprehensive estimates of the extent and nature of tax noncompliance anywhere in the world" However, critics point out numerous problems with the tax gap measure. The IRS direct audit measures of noncompliance are augmented by indirect measurement methods, most prominently currency ratio models
Tax avoidance
, on the other hand, is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. Both tax evasion and avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavorable to a state's tax system.
appears to have reduced tax evasion in the U.S.
commensurate with a lower rate of duty.
is importation or exportation of foreign products through unauthorized route. Smuggling is resorted to for total evasion of leviable customs duties as well as for importation of contraband items. A smuggler does not have to pay any customs duty since the products are not routed through an authorized or notified Customs port and therefore, not subjected to declaration and payment of duties and taxes.
(VAT) has emerged as a modern form of consumption tax
through the world, with the notable exception of the United States
. Producers who collect VAT from the consumers may evade tax by under-reporting the amount of sales. 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 those 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 in fact breaking the law in most cases. Such evasion
is, especially, prevalent in federal states like the Nigeria, US and Canada where sub-national jurisdictions have the constitutional power to charge varying rates of VAT or sales tax. In Nigeria for example, some local states enforce VAT on each goods sold by trader. The price must be clearly stated and the VAT distinct from the price of the good purchased. Any act by the trader contrary to this (like including VAT in the price of the goods) is punishable as attempting to syphoning the VAT.
Borders between tax districts in the same nation usually lack the resources to enforce tax collection on goods carried in private vehicles from one district to another, so states only pursue sales and use tax collection on high-value items such as cars.
by the tax officials often render control of evasion difficult. Tax administrations resort to various means for plugging in scope of evasion and increasing the level of enforcement. These include, among others, privatization of tax enforcement, tax farming, and institution of Pre-Shipment Inspection (PSI) agencies. In 2011, HMRC stated that it would continue to crack down on tax evasion, with a goal of collecting £18 billion in revenue before 2015. A voluntary amnesty program HMRC began in 2010 that targeted middle-class professionals raised £500 million.
by tax officials is a serious problem for the tax administration in a huge number of underdeveloped and southern European countries.
in almost all developed countries and subjects the guilty party to fines and/or imprisonment
. In Switzerland
, many acts that would amount to criminal tax evasion in other countries are treated as civil matters. Even dishonestly misreporting income in a tax return is not necessarily considered a crime. Such matters are dealt with in the Swiss tax courts, not the criminal courts. However, even in Switzerland, some fraudulent tax conduct is criminal, for example, deliberate falsification of records. Moreover, civil tax transgressions may give rise to penalties. So the difference between Switzerland and other countries, while significant, is limited. It is often considered that extent of evasion depends on the severity of punishment for evasion. Normally, the higher the evaded amount, the higher the degree of punishment.
first suggested privatization of tax enforcement for overcoming limitations of government tax administration in controlling tax evasion. Some governments have resorted to privatization
of tax enforcement to enhance efficiency of the tax system. The assumption is that leakage of revenue will lower under a privatized regime. In Bangladesh, part of customs administration was privatized in as early as 1991.
Abuse by private tax collectors (see tax farming below) has led to revolutionary overthrow of governments which have outsourced tax administration.
is an old means of collection of revenue when it is difficult to determine the leviable amount taxes with certainty. Governments lease out the collection system to a private entity for a fixed amount, who then collects the revenue and shoulders the risk of attempts at evasion by the taxpayers. It has been suggested that tax farming may be a solution to the problem of tax evasion seen in developing countries.
Governments have historically turned to tax farming for quick cash. A "tax farmer" buys a "franchise" by making pre-payment to the government. The "tax-farmer," then invested with the authority of the government, goes into the "farm" and begins extracting "taxes" from citizens. This is a system destined to be abusive as the "tax-farmers" seek back their investment, plus profit, and are themselves unrestrained by "politics." 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.
for securing contract for importation by Pakistani importers. She and her husband were sentenced both in Pakistan and Switzerland.
The Internal Revenue Service
has identified small business and sole proprietorship employees as the largest contributors to the tax gap between what Americans owe in federal taxes and what the federal government receives. Rather than W-2 wage earners and corporations, small business and sole proprietorship employees contribute to the tax gap because there are few ways for the government to know about skimming or non-reporting of income without mounting more significant investigations. When tips, side-jobs, cash receipts and batter income is not reported it is illegal cheating because no tax is paid by individuals. Similarly, those who are self-employed or run small businesses may not declare income and evade the payment of taxes.
The IRS has developed several methods of proof of income tax evasion in an effort to decrease the tax gap. These investigations can be carried out to determine the correctness of any tax return, make a return where none has been made, determine the liability of any person for any income tax or collect any income tax. The IRS has the authority to summons the taxpayer to provide particular information for purposes of investigating and ascertaining the correctness of the tax return. The information requested may include books, records, papers and any other data which may be relevant to the investigation. However, the IRS investigator must follow all proper administrative steps in obtaining the information. The IRS tax informant (whistleblower) award was created to assist the IRS in obtaining necessary information. While these investigations can lead to criminal prosecution, the IRS itself has no power to prosecute tax evasion crimes. The IRS can only impose penalties and require payment of proper tax due.
In the United States, the most recent IRS estimate of the tax gap was for 2001 at which time, the tax gap amounted to $345 billion. A more recent study estimates the 2008 tax gap in the range of $450-$500 billion, and unreported income to be approximately $2 trillion. Thus, 18-19 percent of total reportable income is not properly reported to the IRS. The typical tax evader in the United States is a male under the age of 50 in the highest tax bracket and with a complicated return, and the most common means of tax evasion is overstatement of charitable contributions, particularly church donations.
who earn income by illegal means (gambling, theft, drug trafficking etc.) are required to report unlawful gains as income when filing annual tax returns (see e.g., James v. United States), but they often do not do so. Suspected lawbreakers, most famously Al Capone
, have therefore been successfully prosecuted for tax evasion when there was insufficient evidence to try them for their non-tax related crimes. The United States Supreme Court has ruled that a simple declaration of income does not violate an individual's right to remain silent
, although the privilege may apply to the source of the income if claimed. Those who attempt to report illegal income as coming from a legitimate source could be charged with money laundering
. By contrast, in the UK law enforcement agencies do not generally have access to tax returns and so illegal earnings can supposedly be safely declared but in practice those carrying on criminal activities generally prefer not to do so, and so can sometimes be prosecuted for tax evasion rather than for other crimes. Soviet spy Aldrich Ames
, who had earned more than $2 million cash for his espionage
, was also charged with tax evasion as none of the Soviet money was reported on his tax returns. Ames attempted to have the tax evasion charge dismissed on the grounds his espionage profits were illegal, but the charges stood.
The IRS then evaluates new debts and liabilities accumulated in the next year, and assesses the taxpayer’s new net worth at the next year’s end. In addition, the IRS reviews the taxpayer’s cash expenditures throughout the tax year. The IRS then compares the increase in net worth and the cash expenditures with the reported taxable income over time in order to determine the legitimacy of the taxpayer’s reported income.
The net worth method was first used in the case of Capone v. United States. The cash method was approved in 1989 in United States v. Hogan.
Under this program, a taxpayer may file in court if they are not issued a deserved award.
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
s, trusts and other entities to evade tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es 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). Tax evasion is an activity commonly associated with the underground economy and one measure of the extent of tax evasion the amount of unreported income, namely the difference between the amount of income that should legally be reported to the tax authorities and the actual amount reported. In the 1970's and 80's, The IRS undertook the Taxpayer Compliance Measurement Program (TCMP) in an attempt to measure unreported income and the tax gap. The tax gap is the difference between the amount of tax legally owed and the amount actually collected by the government. The TCMP program was believed to produce the most reliable information about noncompliance, but these "audits from hell" were deemed to be overly intrusive and were discontinued in 1988. The National Research Program was undertaken in the 1990's as a less intrusive means of measuring noncompliance and was described as "the most careful and comprehensive estimates of the extent and nature of tax noncompliance anywhere in the world" However, critics point out numerous problems with the tax gap measure. The IRS direct audit measures of noncompliance are augmented by indirect measurement methods, most prominently currency ratio models
Tax avoidance
Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
, on the other hand, is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. Both tax evasion and avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavorable to a state's tax system.
Economics of tax evasion
In 1968, Nobel laureate economist Gary Becker first theorized the economics of crime, on the basis of which Allingham and Sandmo produced in 1972 an economic model of tax evasion. It deals with the evasion of income tax, the main source of tax revenue in the developed countries. According to them, the level of evasion of income tax depends on the level of punishment provided by law. The literature's theoretical models are elegant in their effort to identify the variables likely to affect non-compliant behaviors, however, alternative specifications yield conflicting results concerning both the signs and magnitudes of variables believed to affect tax evasion. As such, 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. The U.S. Tax Reform Act of 1986Tax Reform Act of 1986
The U.S. Congress passed the Tax Reform Act of 1986 to simplify the income tax code, broaden the tax base and eliminate many tax shelters and other preferences...
appears to have reduced tax evasion in the U.S.
Evasion of customs duty
Customs duties are an important source of revenue in the developing countries. The importers purport 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 is reduced through underinvoicing. Misdeclaration of quantity is more relevant for products with specific duty. Production description is changed match an H. S. CodeHarmonized System
The Harmonized Commodity Description and Coding System of tariff nomenclature is an internationally standardized system of names and numbers for classifying traded products developed and maintained by the World Customs Organization , an independent intergovernmental organization with over 170...
commensurate with a lower rate of duty.
Smuggling
SmugglingSmuggling
Smuggling is the clandestine transportation of goods or persons, such as out of a building, into a prison, or across an international border, in violation of applicable laws or other regulations.There are various motivations to smuggle...
is importation or exportation of foreign products through unauthorized route. Smuggling is resorted to for total evasion of leviable customs duties as well as for importation of contraband items. A smuggler does not have to pay any customs duty since the products are not routed through an authorized or notified Customs port and therefore, not subjected to declaration and payment of duties and taxes.
Evasion of value added tax (VAT) and sales taxes
During the later half of the twentieth century, value added taxValue added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
(VAT) has emerged as a modern form of consumption tax
Consumption tax
A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value added tax...
through the world, with the notable exception of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. Producers who collect VAT from the consumers may evade tax by under-reporting the amount of sales. The US has no broad-based consumption tax at the federal level, and no state currently collects VAT; the overwhelming majority of states
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
instead collect sales taxes
Sales taxes in the United States
There is no federal sales or use tax in the United States. 45 states and the District of Columbia impose sales and use taxes on the retail sale, lease and rental of many goods, as well as some services. Many cities, counties, transit authorities and special purpose districts impose additional local...
. Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
uses both a VAT at the federal level (the Goods and Services Tax
Goods and Services Tax (Canada)
The Goods and Services Tax is a multi-level value added tax introduced in Canada on January 1, 1991, by then Prime Minister Brian Mulroney and his finance minister Michael Wilson. The GST replaced a hidden 13.5% Manufacturers' Sales Tax ; Mulroney claimed the GST was implemented because the MST...
) and sales taxes at the provincial level
Sales taxes in Canada
In Canada, three types of sales taxes are levied. These are as follows:*Provincial sales taxes , levied by the provinces*Goods and Services Tax , a value-added tax levied by the federal government...
; some provinces have a single tax combining both forms
Harmonized Sales Tax
The Harmonized Sales Tax is the name used in Canada to describe the combination of the federal Goods and Services Tax and the regional Provincial Sales Tax into a single value added sales tax in five of the ten Canadian provinces: Ontario, New Brunswick, Newfoundland and Labrador, British...
.
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 those 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 in fact breaking the law in most cases. Such evasion
Evasion
Evasion may refer to:*Évasion, a Canadian French-language travel and adventure television channel*Evasion , a deceptive act*Evasion , to avoid government mandate through specious means...
is, especially, prevalent in federal states like the Nigeria, US and Canada where sub-national jurisdictions have the constitutional power to charge varying rates of VAT or sales tax. In Nigeria for example, some local states enforce VAT on each goods sold by trader. The price must be clearly stated and the VAT distinct from the price of the good purchased. Any act by the trader contrary to this (like including VAT in the price of the goods) is punishable as attempting to syphoning the VAT.
Borders between tax districts in the same nation usually lack the resources to enforce tax collection on goods carried in private vehicles from one district to another, so states only pursue sales and use tax collection on high-value items such as cars.
Government response
The level of evasion depends on a number of factors, one of them being fiscal equation. People's tendency to evade income tax declines when the return for due payment of taxes is not obvious. Evasion also depends on the efficiency of the tax administration. CorruptionPolitical corruption
Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
by the tax officials often render control of evasion difficult. Tax administrations resort to various means for plugging in scope of evasion and increasing the level of enforcement. These include, among others, privatization of tax enforcement, tax farming, and institution of Pre-Shipment Inspection (PSI) agencies. In 2011, HMRC stated that it would continue to crack down on tax evasion, with a goal of collecting £18 billion in revenue before 2015. A voluntary amnesty program HMRC began in 2010 that targeted middle-class professionals raised £500 million.
Corruption by tax officials
Corrupt tax officials cooperate with the tax payers who intend to evade taxes. When they detect an instance of evasion, they refrain from reporting in return for illegal gratification or bribe. CorruptionPolitical corruption
Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
by tax officials is a serious problem for the tax administration in a huge number of underdeveloped and southern European countries.
Level of evasion and punishment
Tax evasion is a crimeCrime
Crime is the breach of rules or laws for which some governing authority can ultimately prescribe a conviction...
in almost all developed countries and subjects the guilty party to fines and/or imprisonment
Imprisonment
Imprisonment is a legal term.The book Termes de la Ley contains the following definition:This passage was approved by Atkin and Duke LJJ in Meering v Grahame White Aviation Co....
. In Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
, many acts that would amount to criminal tax evasion in other countries are treated as civil matters. Even dishonestly misreporting income in a tax return is not necessarily considered a crime. Such matters are dealt with in the Swiss tax courts, not the criminal courts. However, even in Switzerland, some fraudulent tax conduct is criminal, for example, deliberate falsification of records. Moreover, civil tax transgressions may give rise to penalties. So the difference between Switzerland and other countries, while significant, is limited. It is often considered that extent of evasion depends on the severity of punishment for evasion. Normally, the higher the evaded amount, the higher the degree of punishment.
Privatization of tax enforcement
Professor Christopher HoodChristopher Hood
Christopher Cropper Hood CBE FBA is Gladstone Professor of Government at Oxford University, and a fellow of All Souls College, Oxford. From 2004–2010 he was director of the ESRC Research Programme Public Services: Quality, Performance and Delivery...
first suggested privatization of tax enforcement for overcoming limitations of government tax administration in controlling tax evasion. Some governments have resorted to privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
of tax enforcement to enhance efficiency of the tax system. The assumption is that leakage of revenue will lower under a privatized regime. In Bangladesh, part of customs administration was privatized in as early as 1991.
Abuse by private tax collectors (see tax farming below) has led to revolutionary overthrow of governments which have outsourced tax administration.
Tax farming
Tax farmingTax farming
Farming is a technique of financial management, namely the process of commuting , by its assignment by legal contract to a third party, a future uncertain revenue stream into fixed and certain periodic rents, in consideration for which commutation a discount in value received is suffered...
is an old means of collection of revenue when it is difficult to determine the leviable amount taxes with certainty. Governments lease out the collection system to a private entity for a fixed amount, who then collects the revenue and shoulders the risk of attempts at evasion by the taxpayers. It has been suggested that tax farming may be a solution to the problem of tax evasion seen in developing countries.
Governments have historically turned to tax farming for quick cash. A "tax farmer" buys a "franchise" by making pre-payment to the government. The "tax-farmer," then invested with the authority of the government, goes into the "farm" and begins extracting "taxes" from citizens. This is a system destined to be abusive as the "tax-farmers" seek back their investment, plus profit, and are themselves unrestrained by "politics." 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 Agencies like SGS, Cotecna etc. are employed to prevent evasion of customs duty through under-invoicing and misdeclaration. However, in the recent times, allegations have been lodged that PSI agencies have actively cooperated with the importers in evading customs duties. Authority in Bangladesh has found Cotecna, a PSI agency of Swiss origin, guilty of complicity with the importers for evasion of customs duties on a huge scale. The same company Cotecna was implicated for bribing Pakistan's prime minister Benazir BhuttoBenazir Bhutto
Benazir Bhutto was a democratic socialist who served as the 11th Prime Minister of Pakistan in two non-consecutive terms from 1988 until 1990 and 1993 until 1996....
for securing contract for importation by Pakistani importers. She and her husband were sentenced both in Pakistan and Switzerland.
United States
Under the federal law of the United States of America, tax evasion or tax fraud, is the purposeful illegal attempt of a taxpayer to evade payment of a tax imposed by the federal government. Conviction of tax evasion may result in fines and imprisonment.The Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
has identified small business and sole proprietorship employees as the largest contributors to the tax gap between what Americans owe in federal taxes and what the federal government receives. Rather than W-2 wage earners and corporations, small business and sole proprietorship employees contribute to the tax gap because there are few ways for the government to know about skimming or non-reporting of income without mounting more significant investigations. When tips, side-jobs, cash receipts and batter income is not reported it is illegal cheating because no tax is paid by individuals. Similarly, those who are self-employed or run small businesses may not declare income and evade the payment of taxes.
The IRS has developed several methods of proof of income tax evasion in an effort to decrease the tax gap. These investigations can be carried out to determine the correctness of any tax return, make a return where none has been made, determine the liability of any person for any income tax or collect any income tax. The IRS has the authority to summons the taxpayer to provide particular information for purposes of investigating and ascertaining the correctness of the tax return. The information requested may include books, records, papers and any other data which may be relevant to the investigation. However, the IRS investigator must follow all proper administrative steps in obtaining the information. The IRS tax informant (whistleblower) award was created to assist the IRS in obtaining necessary information. While these investigations can lead to criminal prosecution, the IRS itself has no power to prosecute tax evasion crimes. The IRS can only impose penalties and require payment of proper tax due.
In the United States, the most recent IRS estimate of the tax gap was for 2001 at which time, the tax gap amounted to $345 billion. A more recent study estimates the 2008 tax gap in the range of $450-$500 billion, and unreported income to be approximately $2 trillion. Thus, 18-19 percent of total reportable income is not properly reported to the IRS. The typical tax evader in the United States is a male under the age of 50 in the highest tax bracket and with a complicated return, and the most common means of tax evasion is overstatement of charitable contributions, particularly church donations.
Illegal income and tax evasion
In the United States, persons subject to the Internal Revenue CodeInternal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
who earn income by illegal means (gambling, theft, drug trafficking etc.) are required to report unlawful gains as income when filing annual tax returns (see e.g., James v. United States), but they often do not do so. Suspected lawbreakers, most famously Al Capone
Al Capone
Alphonse Gabriel "Al" Capone was an American gangster who led a Prohibition-era crime syndicate. The Chicago Outfit, which subsequently became known as the "Capones", was dedicated to smuggling and bootlegging liquor, and other illegal activities such as prostitution, in Chicago from the early...
, have therefore been successfully prosecuted for tax evasion when there was insufficient evidence to try them for their non-tax related crimes. The United States Supreme Court has ruled that a simple declaration of income does not violate an individual's right to remain silent
Fifth Amendment to the United States Constitution
The Fifth Amendment to the United States Constitution, which is part of the Bill of Rights, protects against abuse of government authority in a legal procedure. Its guarantees stem from English common law which traces back to the Magna Carta in 1215...
, although the privilege may apply to the source of the income if claimed. Those who attempt to report illegal income as coming from a legitimate source could be charged with money laundering
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
. By contrast, in the UK law enforcement agencies do not generally have access to tax returns and so illegal earnings can supposedly be safely declared but in practice those carrying on criminal activities generally prefer not to do so, and so can sometimes be prosecuted for tax evasion rather than for other crimes. Soviet spy Aldrich Ames
Aldrich Ames
Aldrich Hazen Ames is a former Central Intelligence Agency counter-intelligence officer and analyst, who, in 1994, was convicted of spying for the Soviet Union and Russia...
, who had earned more than $2 million cash for his espionage
Espionage
Espionage or spying involves an individual obtaining information that is considered secret or confidential without the permission of the holder of the information. Espionage is inherently clandestine, lest the legitimate holder of the information change plans or take other countermeasures once it...
, was also charged with tax evasion as none of the Soviet money was reported on his tax returns. Ames attempted to have the tax evasion charge dismissed on the grounds his espionage profits were illegal, but the charges stood.
Net worth and cash expenditure methods of proof
Under the net worth and cash expenditure methods of proof, the IRS performs year-by-year-by-year comparisons of net worth and cash expenditures to identify under reporting of net worth. While the net worth method and the cash accrual method may be used separately, they are often used in conjunction with one another. Under the net worth method, the IRS chooses a year to determine the taxpayer's opening net worth at year’s end. This provides a snapshot of the taxpayer's net worth at a particular point in time. The snapshot includes the taxpayer’s cash on hand, bank accounts, brokerage (stocks and bonds), house, cars, beach house, jewelry, furs and other similar items. Generally the IRS learns about these items through very thorough and in-depth investigations, sometimes casing the suspected fraudulent taxpayer. In addition, the IRS also assesses the taxpayer’s liabilities. Liabilities include expenses such as the taxpayer’s mortgage, car loans, credit card debts, student loans, and personal loans. The opening net worth is the most critical point at which the IRS must assess the taxpayer's assets and liabilities. Otherwise, the net worth comparison will be inaccurate.The IRS then evaluates new debts and liabilities accumulated in the next year, and assesses the taxpayer’s new net worth at the next year’s end. In addition, the IRS reviews the taxpayer’s cash expenditures throughout the tax year. The IRS then compares the increase in net worth and the cash expenditures with the reported taxable income over time in order to determine the legitimacy of the taxpayer’s reported income.
The net worth method was first used in the case of Capone v. United States. The cash method was approved in 1989 in United States v. Hogan.
Bank deposit cash expenditure method
First approved by the Eighth Circuit in 1935 in Gleckman v. United States, the bank deposit cash expenditure method identifies tax evasion through review of the taxpayer’s bank deposits. This method of investigation primarily focuses on whether the taxpayer’s total bank deposits throughout the year are equal to the taxpayer’s reported income. This method is most appropriate when the majority of the taxpayer’s income is deposited in the bank and most expenses are paid by check. This method is most commonly used for surveillance of tipped employees and is combined with statistical analysis to determine what a tipped employees actual wages are. Information gathered through this method is most successful when the credibility of tipped employees can be destroyed. This method is used less frequently now for tipped employees because the IRS negotiates with hotels or casinos, the largest employers of tipped employees, to identify a tip estimate. If the tipped employee reports the minimal amount agreed upon, he is not questioned by the IRS. However, it is recommended for corroborating other methods of proof. Given the uncertainty of this method, this method likely could not be used in criminal prosecutions where the guilt must be found beyond a reasonable doubt.Whistle blower Program
In addition to the methods of proof the IRS has developed, the IRS has recently adopted a program which allows anonymous whistle blowers to receive 15 to 30 percent of any recovery by the IRS which comes to at least $2 million including all penalties, interests and any other monies collected from the government. The whistle blower program seeks information based on evidence and analysis which can provide a solid basis for further investigation rather than speculation and hearsay. The program is designed to provide incentive to ordinary citizens to snitch on tax cheats. The program provides far greater incentives for whistle blowers than previous programs because under prior programs the government was not required to compensate whistleblowers.Under this program, a taxpayer may file in court if they are not issued a deserved award.
Historical Tax Evasion Cases in the U.S.
- 1932-1939: Al CaponeAl CaponeAlphonse Gabriel "Al" Capone was an American gangster who led a Prohibition-era crime syndicate. The Chicago Outfit, which subsequently became known as the "Capones", was dedicated to smuggling and bootlegging liquor, and other illegal activities such as prostitution, in Chicago from the early...
served 7 years in jail for tax evasion. - 1933: Gangster Dutch SchultzDutch SchultzDutch Schultz was a New York City-area Jewish American gangster of the 1920s and 1930s who made his fortune in organized crime-related activities such as bootlegging alcohol and the numbers racket...
is indicted for tax evasion. Rather than face the charges, he went into hiding. - U.S. President Harry Truman pardons George Caldwell and Seymour Weiss for income tax evasion.
- 1963: Joe ConforteJoe ConforteJoe Conforte was the owner of the Mustang Ranch, a Nevada brothel that was the first legal brothel in the United States. The brothel was closed by the Internal Revenue Service in 1999, but is now reopened under new management...
, a brothel owner, serves two and a half years in prison, convicted for the crime of income tax evasion. - 1971: Martin B. McKneallyMartin B. McKneallyMartin Boswell McKneally was a Republican member of the United States House of Representatives from New York....
(R-NY) is placed on one-year probation and fined $5,000 for failing to file income tax return. He had not paid taxes for many years prior. - Cornelius Gallagher (D-NJ) pleaded guilty to tax evasion, and served two years in prison.
- 1974: Otto Kerner, Jr.Otto Kerner, Jr.Otto Kerner, Jr. was the 33rd Governor of Illinois from 1961 to 1968. He is best known for chairing the National Advisory Commission on Civil Disorders and for accepting bribes....
(D) Resigned as a judge of the Federal Seventh Circuit Court District after conviction for bribery, mail fraud and tax evasion while Governor of Illinois. He was sentenced to 3 years in prison and fined $50,000. - 1982: Frederick W. Richmond (D-NY) is convicted of tax evasion and possession of marijuana. Served 9 months
- 1985: Joseph AliotoJoseph AliotoJoseph Lawrence Alioto was the 36th mayor of San Francisco, California, from 1968 to 1976.-Biography:...
, a lawyer with mafia ties, confesses that he paid no income taxes during the years he served as Mayor of San Francisco. - 1985–1986: Iran-Contra AffairIran-Contra AffairThe Iran–Contra affair , also referred to as Irangate, Contragate or Iran-Contra-Gate, was a political scandal in the United States that came to light in November 1986. During the Reagan administration, senior Reagan administration officials and President Reagan secretly facilitated the sale of...
- Thomas G. ClinesThomas G. ClinesThomas G. Clines was a Central Intelligence Agency covert operations agent who was a prominent figure in the Iran-Contra Affair.-CIA career:As a CIA agent, between 1961–1962, Clines was involved in covert operations in Cuba....
is convicted of four counts of tax-related offenses for failing to report income from the operations. - 1987: Robert Bernard AndersonRobert Bernard AndersonRobert Bernard Anderson was an American administrator and businessman. He served as the Secretary of the Navy between February 1953 and March 1954. He also served as the Secretary of the Treasury from 1957 until 1961....
(R) former United States Secretary of Treasury (1957–1961) pled guilty to tax evasion while operating an offshore bank. - Harry Claiborne (D-NE), Federal District court Judge, is impeached by the Houseand convicted by the Senate on two counts of tax evasion. He served over one year in prison.
- 1990: IRS handed country musician Willie NelsonWillie NelsonWillie Hugh Nelson is an American country music singer-songwriter, as well as an author, poet, actor, and activist. The critical success of the album Shotgun Willie , combined with the critical and commercial success of Red Headed Stranger and Stardust , made Nelson one of the most recognized...
a bill for $16.7 million in back taxes and seized most of his assets to help pay the charges. He sued accounting firm Price Waterhouse, contending that they put him into tax shelters that were later disallowed. The lawsuit was settled for an undisclosed amount. His debts were paid by 1993. - 1991: Harry Mohney, founder of the Déjà VuDéjà vuDéjà vu is the experience of feeling sure that one has already witnessed or experienced a current situation, even though the exact circumstances of the prior encounter are uncertain and were perhaps imagined...
strip club chain, begins to serve three years in prison for tax evasion. - "Matty the Horse" Ianniello (Mafia) was sent to prison for income tax evasion.
- 1992: Catalina Vasquez VillalpandoCatalina Vasquez VillalpandoCatalina "Cathi" Vásquez Villalpando was the 39th Treasurer of the United States from December 11, 1989 to January 20, 1993 under President George H. W. Bush. She had previously held minor positions under President Ronald Reagan and was also a chairman of the Republican National Hispanic Assembly...
(R), Treasurer of the United States, pleads guilty to obstruction of justice and tax evasion. - 1993: Sam Roti, nephew of alderman Fred RotiFred RotiFred B. Roti was a powerful and long serving Alderman of Chicago's First Ward. A federal jury convicted Roti on 11 counts of racketeering, racketeering conspiracy, bribery and extortion.- Background :...
, is indicted on Federal tax charges, which were later dropped. - Nicolas Castronuovo is the owner of the Florida pizza parlor where Senator Robert TorricelliRobert TorricelliRobert Guy Torricelli , nicknamed "the Torch," is an American politician from the U.S. state of New Jersey. Torricelli, a Democrat, served 14 years in the U.S. House of Representatives before being elected to the U.S. Senate...
was caught on an FBI wiretap soliciting contributions in 1996. Nicolas Castronuovo and his grandson Nicholas Melone later pleaded guilty to evading the government of $100,000 in taxes. - 1995: Webster HubbellWebster HubbellWebster Lee "Web" Hubbell , is a former Arkansas lawyer and politician. He was a lawyer in Pulaski County before serving as Mayor of Little Rock from 1979 until he resigned in 1981. He was appointed by Bill Clinton as chief justice of Arkansas State Supreme Court in 1983...
, (D) Associate Attorney General, pleads guilty to mail fraud and tax evasion. He is sentenced to 21 months in prison. - 1996: Heidi FleissHeidi FleissHeidi Lynne Fleiss is an American former madam, and also a columnist and television personality regularly featured in the 1990s in American media. She is often referred to as the "Hollywood Madam"....
is convicted of federal charges of tax evasion and sentenced to 7 years in prison. After two months she was released to a halfway house, with 370 hours of community service. - U.S. President Bill ClintonBill ClintonWilliam Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...
pardons Marc RichMarc RichMarc Rich is an international commodities trader and entrepreneur. He is best known for founding the commodities company Glencore. He was indicted in the United States on federal charges of illegally making oil deals with Iran during the late 1970s-early 1980s Iran hostage crisis and tax evasion...
and Pincus GreenPincus GreenPincus Green is an American oil and gas commodities trader whose net worth is estimated by Forbes magazine at $1.2 billion USD. Green fled the United States in 1983, along with partner Marc Rich, after being indicted by U.S...
, indicted by U.S. Attorney on charges of tax evasion and illegal trading with Iran. President Clinton also pardons Edward Downe, Jr. for wire fraud, filing false income tax returns,, and securities fraud. - 2002: James TraficantJames TraficantJames Anthony Traficant, Jr. is a former Democratic Representative in the United States Congress from Ohio . He represented the 17th Congressional District, which centered on his hometown of Youngstown and included parts of three counties in northeast Ohio's Mahoning Valley...
(D-OH) is convicted of ten felony counts including bribery, racketeering and tax evasion and sentenced to 8 years in prison. - 2002: The Christian Patriot Association, an "ultra-right-wing group", is shut down after convictions for tax fraud and tax evasion.
- 2005: Duke CunninghamDuke CunninghamRandall Harold Cunningham , usually known as Randy or Duke, is United States Navy veteran, convicted felon, and former Republican member of the United States House of Representatives from California's 50th Congressional District from 1991 to 2005.Cunningham resigned from the House on November 28,...
(R-CA) pleads guilty to charges of conspiracy to commit bribery, mail fraud, wire fraud and tax evasion in what came to be called the Cunningham scandal. He is sentenced to over eight years. - 2008: Actor Wesley SnipesWesley SnipesWesley Trent Snipes is an American actor, film producer, and martial artist, who has starred in numerous action films, thrillers, and dramatic feature films. Snipes is known for playing the Marvel Comics character Blade in the Blade film trilogy, among various other high profile roles...
is sentenced to 3 years in jail for tax evasion. - 2008: Charles Rangel (D-NY) failed to report $75,000 income from the rental of his villa in Punta Cana, Dominican Republic and was forced to pay $11,000 in back taxes.
- 2008: Senator Ted Stevens (R-AK) is convicted on 7 counts of bribery and tax evasion just prior to the election. He continued his run for re-election, but lost.
- Jack AbramoffJack AbramoffJack Abramoff is an American former lobbyist and businessman. Convicted in 2006 of mail fraud and conspiracy, he was at the heart of an extensive corruption investigation that led to the conviction of White House officials J. Steven Griles and David Safavian, U.S. Representative Bob Ney, and nine...
(R), lobbyist, is found guilty of conspiracy, tax evasion and corruption of public officials in three different courts in a wide ranging investigation. Currently serving 70 months and fined $24.7 million - Jared CarpenterJared CarpenterRobert Jared Carpenter was the vice president of the Council of Republicans for Environmental Advocacy beginning in 2000. In 2007, he pleaded guilty to one count of income tax evasion. He and CREA president Italia Federici, who previously pleaded guilty on similar charges, had used CREA funds for...
(R), Counsel of Republicans for Environmental Advocacy, pled guilty to income tax evasion, and received 45 days, plus 4 years probation.
External links
- US Justice Dept press release on Jeffrey Chernick, UBS tax evader
- US Justice Tax Division and its enforcement efforts