Under Reporting Income – How Tax Evasion Works?

What is tax evasion?

Tax evasion is to conceal, understate, or unethically or fraudulently alter income to lower tax liabilities. It includes intentionally failing to pay taxes in a given period or paying less than the actual tax allocated.

Any entity can under report its income in two ways- either they tell the government that it made less money than it did during the tax year, or it can claim more deductions, tax credits, and exemptions than they deserve.

Shockingly, the biggest culprits of tax evasion are people who own their businesses, and public companies, rather than wage and salary employees.

How does tax evasion work?

If we take an example of the under-reporting of income of a struggling public company, we can understand how it’s done. If the company experiences a sharp drop in the share prices, in many cases it will report lower revenue than it earned during that fiscal quarter. Then this hidden figure will be lumped with the revenue in the following quarter’s earning statement.

This will look like the company has rebounded and is doing much better. It will inspire investors and ultimately boost the company’s stock prices. But sometimes tax evasion will be committed purely for personal benefits. Naturally in any form, underreporting is an illegal practice.

What are some common methods of tax evasion?

We discussed an elaborate method of tax evasion above. Now we will see what are some other common methods of tax evasion, which are:

  1. Concealment of actual income
  2. Fake documents
  3. Transacting in cash
  4. Offshore bank accounts
  5. Not filing Income tax return
  6. Inaccurate income tax return data

Consequences of underreporting of tax-

Individuals or companies, whoever is caught underreporting their income are subjected to fiscal penalties, and in some cases, even face criminal charges.

However, it is also to be kept in mind that tax evasion is a criminal activity if the offender has willfully disregarded the tax law of the country. If this occurs due to mathematical or calculation errors, or due to negligence of the parties involved, then the offender will only face tax penalties, and any criminal charges will not be initiated against them. Be sure to check out taxreliefprofessional.com to learn more about this topic.