Tax Avoidance and Tax Evasion

Tax noncompliance (informally tax avoision) is a range of activities that are unfavorable to a government's tax system. This may include tax avoidance, which is tax reduction by legal means, and tax evasion which is the criminal non-payment of tax liabilities.  The use of the term 'noncompliance' is used differently by different authors.  Its most general use describes non-compliant behaviors with respect to different institutional rules resulting in what Edgar L. Feige calls unobserved economies.  Non-compliance with fiscal rules of taxation gives rise to unreported income and a tax gap that Feige estimates to be in the neighborhood of $500 billion annually for the United States.

In the United States, the use of the term 'noncompliance' often refers only to illegal misreporting.  Laws known as a General Anti-Avoidance Rule (GAAR) statutes which prohibit "tax aggressive" avoidance have been passed in several developed countries including the United States (since 2010), Canada, Australia, New Zealand, South Africa, Norway and Hong Kong.  In addition, judicial doctrines have accomplished the similar purpose, notably in the United States through the "business purpose" and "economic substance" doctrines established in Gregory v. Helvering. 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.

Individuals that do not comply with tax payment include tax protesters and tax resisters. Tax protesters attempt to evade the payment of taxes using alternative interpretations of the tax law, while tax resisters refuse to pay a tax for conscientious reasons. In the United States, tax protesters believe that taxation under the Federal Reserve is unconstitutional, while tax resisters are more concerned with not paying for particular government policies that they oppose. Because taxation is often perceived as onerous, governments have struggled with tax noncompliance since the earliest of times.

Differences between Avoidance and Evasion

The use of the terms tax avoidance and tax evasion can vary depending on the jurisdiction. In general, the term "evasion" applies to illegal actions and "avoidance" to actions within the law. The term "mitigation" is also used in some jurisdictions to further distinguish actions within the original purpose of the relevant provision from those actions that are within the letter of the law, but do not achieve its purpose.

As the difference between the two concepts is currently becoming less clear, law professor Allison Christians deplores the condition that morality is being cited as a criterion instead of the rule of law.

History

An avoidance/evasion distinction along the lines of the present distinction has long been recognised but at first there was no terminology to express it. In 1860 Turner LJ suggested evasion/contravention (where evasion stood for the lawful side of the divide): Fisher v Brierly.  In 1900 the distinction was noted as two meanings of the word "evade": Bullivant v AG.  The technical use of the words avoidance/evasion in the modern sense originated in the US where it was well established by the 1920s.  It can be traced to Oliver Wendell Holmes in Bullen v. Wisconsin.

It was slow to be accepted in the United Kingdom. By the 1950s, knowledgeable and careful writers in the UK had come to distinguish the term "tax evasion" from "avoidance". However, in the UK at least, "evasion" was regularly used (by modern standards, misused) in the sense of avoidance, in law reports and elsewhere, at least up to the 1970s. Now that the terminology has received official approval in the UK (Craven v White), this usage should be regarded as erroneous. But even now it is often helpful to use the expressions "legal avoidance" and "illegal evasion", to make the meaning clearer.

Tax Avoidance and Evasion in the United States

In the United States "tax evasion" is evading the assessment or payment of a tax that is already legally owed at the time of the criminal conduct.  Tax evasion is criminal, and has no effect on the amount of tax actually owed, although it may give rise to substantial monetary penalties.

By contrast, the term "tax avoidance" describes lawful conduct, the purpose of which is to avoid the creation of a tax liability in the first place. Whereas an evaded tax remains a tax legally owed, an avoided tax is a tax liability that has never existed.

For example, consider two businesses, each of which have a particular asset (in this case, a piece of real estate) that is worth far more than its purchase price.

• Business One (or an individual) sells the property and underreports its gain. In this instance, tax is legally due. Business One has engaged in tax evasion, which is criminal.
• Business Two (or an individual) consults with a tax advisor and discovers that the business can structure a sale as a "like-kind exchange" (formally known as a 1031 exchange, named after the Code section) for other real estate that the business can use. In this instance, no tax is due of the provisions of section 1031 of the Internal Revenue Code. Business Two has engaged in tax avoidance (or tax mitigation), which is completely within the law.

In the above example, tax may or may not eventually be due when the second property is sold. Whether and how much tax will be due will depend on circumstances and the state of the law at the time.

Definition of Tax Evasion in the United States

The application of the U.S. tax evasion statute may be illustrated in brief as follows. The statute is Internal Revenue Code section 7201:

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

Under this statute and related case law, the prosecution must prove, beyond a reasonable doubt, each of the following three elements:

1. the "attendant circumstance" of the existence of a tax deficiency – an unpaid tax liability; and

2. the actus reus (i.e., guilty conduct) – an affirmative act (and not merely an omission or failure to act) in any manner constituting evasion or an attempt to evade either:

i.  the assessment of a tax, or

ii. the payment of a tax.

3. the mens rea or "mental" element of willfulness – the specific intent to violate an actually known legal duty.

An affirmative act "in any manner" is sufficient to satisfy the third element of the offense. That is, an act which would otherwise be perfectly legal (such as moving funds from one bank account to another) could be grounds for a tax evasion conviction (possibly an attempt to evade payment), provided the other two elements are also met. Intentionally filing a false tax return (a separate crime in itself)[33] could constitute an attempt to evade the assessment of the tax, as the Internal Revenue Service bases its initial assessment (i.e., the formal recordation of the tax on the books of the U.S. Treasury) on the tax amount shown on the return.

https://en.wikipedia.org/wiki/Tax_noncompliance