Question

One of the major sources of revenue for the government is Tax. The government spends the tax that it collected on various activities which include nation building and social welfare of citizens and residents. The government charges tax to individuals and corporates as per the tax provision in the country, but there have been many incidences where the payers have not paid taxes to the government. The country’s tax authority is empowered to implement the tax laws and also penalise those dodging payments. It takes various measures to reduce the possibility of tax evasion and tax avoidance. Since tax revenue is an important source of income, tax evasion and avoidance affect the country’s economic growth and development.

You are requested:

A) To write a detailed report and analyse any five possible reasons & techniques used by individuals and corporates to avoid and/or evade tax. ​​

B) To write a detailed report on impact of tax evasion on the economic situation of a country and measures that can be taken by tax authorities to remove such practises.

Answer 1

A.Reasons & techniques used by individuals and corporates to avoid and/or evade tax. ​​

• Failing to pay the due:

  This is the simplest way in which someone may evade taxes. They simply won't pay it to the government, not even when the dues are called for. A person engaged in this sort of tax evasion won't, willingly or unwillingly, pay the tax before or after the due date.

• Smuggling:

  When certain goods move from one location to another, across international or state borders, a tax or charge may be payable in order to move the goods. However, some individuals may move these goods in surreptitious ways in order to avoid paying those taxes that evading the tax altogether.

• Submitting false tax returns:

  In some cases, when an individual files taxes, they may submit false or incorrect information in order to either lessen the tax that they are supposed to pay or not pay it at all. This is also tax evasion since the complete information is not provided and they may actually be paying less than what they should.

• Inaccurate financial statements:

  The taxes that are payable by an individual or an organisation may be decided on the financial dealing that have taken place during the assessment year. If false financial documents or accounts books are submitted, ones that show incomes less than what was actually earned, the tax may come down.

• Using fake documents to claim exemption:

  The government may have provided certain exemptions and privileges to certain strata or members of society in order to ensure they have a bit more financial freedom to progress. In some cases, members who actually don't qualify for such privileges will get documents created to support their claim of being a part of that group thus claiming exemptions where they are not suited.

• Not reporting income:

  It could be said that this is one of the most common methods of tax evasion. In this case, individual just won't report any income that they receive during a financial year. Not having reported any income, they don't pay any tax thus successfully evading tax all together. The simplest example of this would be a landlord who has kept tenants but has not informed the authorities that he has rented the house and is actually receiving an income from it.

• Bribery:

  There may be a situation where there a certain amount due in taxes which the individual may not be willing to pay. In such a case he or she may actually offer a bribe to officials to not make them pay the tax and to make it 'disappear'.

b.Impact of tax evasion on the economic situation of a country

. Tax evasion deprives

1.Government of money needed to carry out laws and initiatives,

Reduces the effectiveness of government and

Increases budget deficits.

Measures that can be taken by tax authorities to remove such practises.

Civil Penalties

A civil tax penalty typically arises after a state or federal tax investigator has noticed a problem with a tax return. This problem can be anything from glaring mistakes to simple calculation errors or other problems. Civil tax cases may result in no penalty at all, or may result in a variety of fines. For example, forgetting to file a return will result in a 5% penalty based on the amount of taxes due per month, while intentionally filing a fraudulent return can result in a 75% penalty.

Criminal Penalties

Individuals commonly commit tax fraud by violating any number of federal criminal laws, such as underreporting income, overestimating expenses or deductions, failing to collect employment taxes, making false statements to investigators, violating employer withholding requirements, or not filing a yearly tax return.

Individual federal laws govern each type of criminal offense, and each of these have penalties associated with them. Additionally, each state has its own tax fraud laws and penalties.

• Prison. Prison terms for tax fraud can be significant. For example, a conviction for single count of tax evasion can result in a prison term of up to five years. Convictions on multiple counts of the same crime, or multiple violations of different crimes, can greatly lengthen prison sentences.

• Fines. Fines for violating federal tax laws are very steep. A conviction for tax evasion, as well as several other tax crimes, can result in a fine of up to $250,000 for individuals and $500,000 for corporations. Other tax fraud crimes have maximum penalties of $100,000 for individuals and $250,000 for corporations. Courts can impose fines in addition to, or separate from, prison or probation sentences.

• Restitution. Tax fraud cases also typically involve restitution orders. When a court orders restitution, it orders the person convicted of tax fraud to repay the amount of taxes they failed to pay to the state or federal government. Restitution is typically ordered in addition to any other penalties.

• Costs of prosecution. Federal law also allows a court to order someone convicted of tax fraud to pay for the costs of prosecution, in addition to fines or restitution. The costs of prosecuting a tax fraud case differ, but they can easily reach $5,000 or more.

• Probation. Courts may also sentence someone convicted of tax fraud to probation. Probation sentences usually last at least a year, but sentences of three years or longer are possible. Those on probation have to comply with the court's orders or risk having their probation extended, paying additional fines, being sent to prison, or other penalties. People on probation must comply with specific conditions while serving the sentence. These include regularly meeting with and reporting to a probation officer, contacting the officer if you're ever arrested, maintain employment, and a range of other requirements.