An overhaul of the term tax evasion, tax avoidance and tax delinquent and how can the government or tax authorities handle the situation

Definition of tax
A tax is a financial charge or other
levy imposed upon a taxpayer (an individual or
legal entity) by a state or the functional equivalent of a state such that
failure to pay, or evasion of or resistance to collection, is punishable by
law. Taxes are also imposed by many
administrative divisions. Taxes consist of direct or indirect taxes and may be paid in money or as its labour
equivalent.

The
legal definition and the economic definition of taxes differ in that economists
do not consider many transfers to governments to be taxes. For example, some
transfers to the public sector are comparable to prices. Examples include
tuition at public universities and fees for utilities provided by local
governments. Governments also obtain resources by creating money and coins
(e.g., printing bills and minting coins), through voluntary gifts (e.g.,
contributions to public universities and museums), by imposing penalties (e.g.,
traffic fines), by borrowing, and by confiscating wealth. From the view of
economists, a tax is a non-penal, yet compulsory transfer of resources from the
private to the public sector levied on a basis of predetermined criteria and
without reference to specific benefit received.
Tax
evasion
Tax evasion is the illegal evasion of taxes by individuals, corporations
and
trusts.
Tax evasion often entails taxpayers deliberately misrepresenting the true state
of their affairs to the tax authorities to reduce their tax liability and
includes dishonest tax reporting, such as declaring less income, profits or
gains than the amounts actually earned, or overstating deductions. Tax evasion
is an activity commonly associated with the
informal economy.
One measure of the extent of tax evasion (the “tax gap”) is the
amount of unreported income, which is the difference between the amount of
income that should be reported to the tax authorities and the actual amount
reported.
Types of tax evasion
1.   
Economics of tax evasion:  This model deals with the evasion of income tax, the main source of tax
revenue in developed countries. The level of evasion of income tax depends on
the level of punishment provided by law. Income tax evasion appears to be
positively influenced by the
tax rate, the unemployment rate, the level of income and dissatisfaction with
government
2.   
Evasion of custom duty: Customs duties are an important source of revenue
in developing countries. 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 can be reduced through
underinvoicing. Misdeclaration of quantity is more relevant for products with
specific duty.
3.     
Smuggling: Smuggling is importation or exportation of foreign products
by illegal means. Smuggling is resorted to for total evasion of customs duties,
as well as for the importation of contraband. A smuggler does not have to pay
any customs duty since smuggled products are not routed through customs-tax
compliant customs ports, and are therefore not subjected to declaration and, by
extension, to the payment of duties and taxes
4.     
Evasion of value
added tax (VAT) and sales taxes:
Value added tax (VAT) emerged as a modern form of consumption tax throughout the world, with the notable exception
of the
United States. Producers who collect VAT from consumers may
evade tax by under-reporting the amount of sales. 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 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 technically breaking the law in most cases. This is especially
prevalent in
federal countries like Nigeria, US and Canada where sub-national
jurisdictions charge varying rates of VAT or sales tax. In Nigeria, for
example, some
federated states enforce VAT on each item of goods sold by traders.
The price must be clearly stated and the VAT shown separately from the basic
price. If the trader does not comply (e.g. by including the VAT in the price of
the goods) this is punishable as an attempt to siphon the VAT.
Tax avoidance
Tax avoidance is the legal usage 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.
Tax sheltering is very similar, and tax havens are jurisdictions which facilitate reduced taxes.
The term tax mitigation is
sometimes used; its original use was by tax advisers as an alternative to the
pejorative term tax evasion. “Tax aggressive” strategies fall into
the grey area between commonplace and well-accepted tax avoidance (such as
purchasing municipal bonds in the United States) and evasion. However, the uses
of these terms vary.
Though
the specifics may vary according to jurisdiction, these rules invalidate tax
avoidance which is technically legal but not for a business purpose or in
violation of the spirit of the tax code. Related terms for tax avoidance
include tax planning and
tax sheltering.
The
term avoidance has also been used in the tax regulations of some jurisdictions
to distinguish tax avoidance foreseen by the legislators from tax avoidance
which exploits
loopholes in the law such as like-kind
exchanges
. Tax evasion, on the other hand, is the general term for
efforts by individuals,
corporations, trusts and other entities to evade taxes by illegal
means. Both tax avoidance and evasion can be viewed as forms of
tax non-compliance, as they describe a range of activities that are
unfavourable to a state’s tax system.
Methods of tax avoidance
1.    Country of residence: A company may choose to avoid taxes by establishing
their company or subsidiaries in an
offshore jurisdiction (see offshore company and offshore trust). Individuals may also avoid tax by moving their tax residence to a tax haven, such as Monaco, or by becoming a perpetual
traveller
.
They may also reduce their tax by moving to a country with lower tax rates.
However, a small number of countries
tax their citizens on their worldwide income regardless of where they reside. As of 2012, only
the
United States and Eritrea have such a practice, whilst Finland, France, Hungary, Italy and Spain apply it in limited circumstances. In cases such
as the US, taxation cannot be avoided by simply transferring assets or moving
abroad.
2.    Double taxation: Most
countries impose taxes on income earned or gains realized within that country
regardless of the country of residence of the person or firm. Most countries
have entered into bilateral
double taxation treaties with many other countries to avoid taxing
nonresidents twice—once where the income is earned and again in the country of
residence (and perhaps, for U.S. citizens, taxed yet again in the country of
citizenship)—however, there are relatively few double-taxation treaties with
countries regarded as tax havens.
To avoid tax, it is usually not enough to simply
move one’s assets to a tax haven. One must also personally move to a tax haven
(and, for U.S. citizens, renounce one’s citizenship) to avoid tax.
3.    Legal entities: Without
changing country of residence (or, if a U.S. citizen, giving up one’s
citizenship), personal taxation may be legally avoided by the creation of a
separate
legal entity to which one’s property is donated. The separate
legal entity is often a
company, trust, or foundation. These may also be located offshore, such as in
the case of many
private
foundations
. Assets are transferred to the new company or trust so that gains may
be realized, or income earned, within this legal entity rather than earned by
the original owner. If assets are later transferred back to an individual, then
capital gains taxes would apply on all profits. Also income tax would still be due on any salary or dividend drawn from the legal entity. For a settlor (creator of a trust) to avoid tax there may be
restrictions on the type, purpose and beneficiaries of the trust. For example,
the settlor of the trust may not be allowed to be a
trustee or even a beneficiary and may thus lose control of the assets
transferred and/or may be unable to benefit from them.
4.    Legal vagueness: Tax
results depend on definitions of legal terms which are usually vague. For
example, vagueness of the distinction between “business expenses” and
“personal expenses” is of much concern for taxpayers and tax
authorities. More generally, any term of tax law has a vague penumbra, and is a
potential source of tax avoidance.

5.     
Tax shelters: Tax shelters are investments that allow, and purport to allow, a reduction in one’s
income tax liability. Although things such as home ownership, pension plans,
and Individual Retirement Accounts (IRAs) can be broadly considered “tax
shelters”, insofar as funds in them are not taxed, provided that they are
held within the Individual Retirement Account for the required amount of time,
the term “tax shelter” was originally used to describe primarily
certain investments made in the form of limited partnerships, some of which
were deemed by the U.S. Internal Revenue Service to be abusive.

Delinquent tax
Delinquent
tax refers to a tax that is unpaid after the payment due date. Usually a
penalty is attached to a delinquent tax. The power, jurisdiction and authority
to collect all delinquent taxes are vested in the state tax commission. An
account becomes delinquent when the due date for a tax return or other
established liability has passed and the amount due remains unpaid. When this
happens,
1.      Penalties
and interest begin to accrue on the unpaid tax until the entire balance is paid
in full.
2.      If
you don’t respond to letters or notices and your account continues to be
delinquent, it is assigned to a Revenue Agent for collection.
3.      The
Revenue Agent will attempt to contact you by telephone, letter or in person to
resolve the delinquency.
What happens if you
do not respond or make satisfactory payment arrangements during the collection
process?
·        
The Department may issue an assessment and then a tax warrant covering
all unpaid tax, penalty and interest.
·        
If a tax warrant is not paid ten days after the issue date, it is filed
with the county Superior Court.
·        
A filed tax warrant establishes a lien against real and personal
property and enables the Department to seize property (bank accounts, wages,
personal property) to pay the debt.
·        
If a filed tax warrant remains unpaid after 30 days, a hearing to revoke
the business’s tax registration endorsement may be held.
How government handle the situation concerning tax
evasion, tax avoidance and delinquent tax
The
level of evasion depends on a number of factors, including the amount of money
a person or a corporation possesses. Efforts to evade income tax decline when
the amounts involved are lower. The level of evasion also depends on the
efficiency of the tax administration. Corruption by tax officials makes it
difficult to control evasion. Tax administrations use various means to reduce
evasion and increase the level of enforcement: for example, privatization of
tax enforcement, tax farming. Corrupt tax officials co-operate with
the taxpayers who intend to evade taxes. When they detect an instance of
evasion, they refrain from reporting it in return for
bribes. Corruption by tax officials is a serious problem for the tax
administration in many less developed countries.

Level of evasion and punishment

Tax
evasion is a crime in almost all developed countries, and the guilty party is
liable to
fines
and/or
imprisonment.
In so many countries many acts that would amount to criminal tax evasion in
other countries are treated as civil matters. Dishonestly misreporting income
in a tax return is not necessarily considered a crime. Such matters are handled
in the tax courts, not the criminal courts
However,
some tax misconduct is criminal, for example, deliberate falsification of
records. Moreover, civil tax transgressions may give rise to penalties. It is
often considered that the extent of evasion depends on the severity of
punishment for evasion.

 

Privatization of tax enforcement

Privatization of
tax enforcement to control tax evasion more efficiently than a government
department would and some governments have adopted this approach. Abuse by
private tax collectors (see tax farming below) has on occasion led to
revolutionary overthrow of governments who have outsourced tax administration.

 

Tax farming

Tax farming
is an historical means of collection of revenue. Governments received a lump
sum in advance from a private entity, which then collects and retains the
revenue and bears the risk of evasion by the taxpayers. It has been suggested
that tax farming may reduce tax evasion in less developed countries. This
system may be liable to abuse by the “tax-farmers” seeking to make a
profit, without being subject to political constraint.

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