Federal tax evasion is the effort to avoid the payment of taxes owed to the government of a country by a business or individual, usually through illegal means. The non-payment of taxes can be characterized as evasion, minimization or avoidance. Tax avoidance is the use of the tax administration system to lessen the amount of tax owed. Tax evasion is avoiding the payment of taxes altogether, and if proven, it usually carries a felony offense. Tax minimization is the reduction of taxes through legal means.
It is the right of taxpayers to reduce their tax amounts to result in the lowest possible payment, and when done correctly, tax minimization is not considered an unlawful act. If the individual intentionally participates in illegal means to lower taxes, or misreports or fails to file taxes altogether in countries that require this, it is considered a crime and can carry severe consequences. The laws surrounding taxation differ slightly from country to country and become even more complicated when income is earned in a country different from the primary country of residence.
Federal tax evasion is a global issue that offers one of the explanations for large monetary differences between amounts projected to be owed and those actually collected. The tax gap is a term used to describe the difference between what the government is expected to be paid and what is actually collected. Individuals that file a tax return that is different than what the government expects can be lead to a tax audit. In most countries, people are required to report all annual income on their tax returns, unless they are in a territory considered a tax haven. A tax haven is a location where federal taxes are decreased or not applicable. What is considered income and what is subject to taxes can vary in different countries.
Illegal income is money gained through methods that are not within the confines of the law as it is defined by the country where the person is living. Obviously, when money is gained through illegal means, such as trafficking, drug dealing, gambling, or stealing, individuals are reluctant to report it on a government document. The illegally obtained income may go unreported or be misreported as legal income. Acquiring illegal income is one major contributor to incidences of federal tax evasion across the globe, and as such, governments worldwide have an interest in increasing tax compliance.
Federal tax evasion is considered a serious crime regardless of location. Intentional attempts to evade taxes can carry heavy penalties, and governments can institute a multitude of penalties if tax evasion is proven. Fines, loss of assets and jail time are a few of the common consequences of federal tax evasion, and these consequences may be more or less severe depending on the country where the crime is committed.