TAX FRAUD

SOUMYA KUDIYARASU -08D0032 NIMMI SARA JOSE -08D0020

people legally defer paying personal taxes by creating a legal separate entity to which they donate their property. n der this method. his helps tax payers as they are able to avoid paying double taxes. and for different categories of people and/or companies (tax haven A tax haven is a country or territory where certain taxes are levied at a low rate or not at all. Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels. ifferent jurisdictions tend to be havens for different types of taxes. or trust. the tax system. credits. the person may also become a regular traveler so that taxation can be avoided. once in the country where the income has been earned and then again in the resident country. the company or person changes the tax residence to a place that is a tax haven in order to lower the amount of taxes that they pay. the resident country of the firm or person. his creates a situation of tax competition among governments. he income tax department provides many provisions through which the people can go for ax Avoidance such as refunds. So that people do not have to pay double taxes. many countries have gone for bilateral treaties of double taxation with other countries. and many other kinds of entitlements. Legal entities: Legal entitie s are a method that people follow when they want to go for ax Avoidance. company. benefits. Avoidance ax includes situations when people eliminate or reduce tax by following a transaction or many transactions that are legal. ethods of tax avoidance: Country of residence: Country of residence is a method that people adopt when they go for Avoidance of ax. he legal separate entity that is set up is often a foundation.) Double taxation: Double taxation means that many countries charge taxes on the income that has been earned inside that country without taking into consideration. Avoidance of ax should not be encouraged and the government should also take measures in order to prevent it. ax Avoidance reduc es the revenue of the government and also brings into disrepute. nder this method of ax Avoidance. Ideally. he properties are transferred to the trust or . nder this method of Avoidance ax. he Avoidance of ax is usually done by the people who desire to keep their money with themselves and not give it to the government.Tax avoidance Tax Avoidance means the tax regime's legal use for one's own personal advantage so as to lessen the tax amount that is payable to the government by ways that are legal.

individuals can avoid personal taxation although certain taxes such as corporate taxes are still applicable.) Methods of tax evasion: Evasion of customs duty: Customs duty evasion is another method of ax Evasion under which the importers evade paying customs duty by false declarations of the description of the product and quantity. profits. company. individuals. vagueness of the distinction between "business expenses" and "personal expenses" is of much concern for taxpayers and tax authorities. and individuals evade paying taxes. any term of tax law. or example. as a result of which the income that is earned belongs to this entity and not by the owner. he importers in order to evade paying customs duty als o resort to under invoicing. ax Evasion is a crime in all major countries and the guilty parties are subjected to imprisonment and fines. or tr ust can also avoid corporate taxes if the entity is set up in a jurisdiction that considered offshore. the foundation. he level of ax Evasion is also dependent on the tax administration's efficiency and corruption levels. firms. Legal vagueness: ax results depend on definitions of legal terms which are usually vague. he Evasion of ax level depends on certain factors such a s fiscal equation which means that people's tendency to pay less tax declines when the payment due from taxes becomes obvious. or income than what has been actually earned and they even go for overstating deductions. he level of Evasion ax also depends on the chartered accountants and tax lawyers who help companies. and is a potential source of tax avoidance . Evasion ax takes place when the people report dishonest tax that includes declaring less gains. Tax evasion Tax Evasion entails the efforts that are made by trus ts. he Evasion of ax usually takes place when taxpayers deliberately hide their incomes from the tax authorities in order to reduce their liability of tax. ore generally. (tax gap: he difference between the amount of tax legally owed and the amount actually collected by a government is sometimes called the tax gap. In order to go for ax Avoidance.company. people are taxed personally on earnings and pr operty that they own and thus by transferring property to a legal separate entity. and various other entities to avoid paying taxes by illegal and unfair means. sually. firms. has a vague penumbra. .

with the notable exception of the the amount of sales. Intranational borders in such countries usuall y lack customs offices or similar facilities that could effectively control the movement of any goods carried in private vehicles from one jurisdiction to another and most of the respective state and provincial governments simply lack the manpower and resources to pursue and prosecute every case of state/provincial sales tax evasion arising from purchases which do not cross state or provincial borders other than for major purchases such as cars. Canada uses both a VA at the federal level (the Goods and Services ax ) and sales taxes at the provincial level . not subjected to declaration and payment o f duties and taxes. most jurisdictions which levy a VA or sales tax also legally require their residents to report and pay the tax on items purchased in another jurisdiction. [1   ] nited States. In addition. People's tendency to evade income tax declines when the return for due payment of taxes is not obvious. the overwhelming majority of states instead collect sales taxes. Evasion of value added tax (VAT) and sales taxes: During the later half of the twentieth century. A smuggler does not have to pay any customs duty since the products are not routed through an authorized or notified Customs port and therefore. his means that those consumers who purchase something in a lower taxed or untaxed jurisdiction with the intention of avoiding VA or sales tax in their home jurisdiction are in fact breaking the law in most cases. Producers who collect VA from the consumers may evade tax by under reporting he S has no broad based consumption tax at the federal level.[11] Control of evasion Level of evasion depends on a number of factors one of them being fiscal equation. S and Canada where sub national jurisdictions have the constitutional power to charge varying rates of VA or sales tax. In igeria for example. and no state currently collects VA . Smuggling is resorted to for total evasion of leviable customs duties as well as for importation of contraband items.Smuggling: Smuggling is importation or exportation of foreign products through unauthorized route. he price must be clearly stated and the VA distinct from the price of the good purchased. some provinces have a single tax combining b oth forms. value added tax (VA ) has emerged as a modern form of consumption tax through the world. . Such evasion is especially prevalent in federal states like the igeria. Evasion also depends on the efficiency of the tax administration. some local states enforce VA on each goods sold by trader. Corruption by the tax officials often render control of evasion difficult. Any act by the trader contrary to this (like including VA in the price of the goods) is punishable as attempting to syphoning the VA .

Privatization of tax enforcement: Privatization of tax enforcement was suggested for overcoming limitations of government tax administration in controlling tax evasion. Tax farming: Tax farming is an old means of collection of revenue when it is difficult to determine the leviable amount taxes with certainty. So the difference between Switzerland and other countries. even in Switzerland. for example. civil ta x transgressions may give rise to penalties. is limited. Abuse by private tax coll ectors (see tax farming below) has led to revolutionary overthrow of governments which have outsourced tax administration. Such matters are dealt with in the Swiss tax courts. ormally. Corruption by tax officials Corrupt tax officials cooperate with the tax payers who intend to evade taxes. However. they refrain from reporting in return for illegal gratification or bribe. Governments lease out the collection system to a . the higher the degree of punishment. Some governments have resorted to privatization of tax enforcement to enhance efficiency of the tax system. Even dishonestly misreporting income in a tax return is not necessarily considered a crime. The assumption is that leakage of revenue will lower under a privatized regime. the higher the evaded amount. Level of evasion and punishment Tax evasion is a crime in almost all developed countries and subjects the guilty party to fines and/or imprisonment in China the punishment can be as severe as the death penalty. some fraudulent tax conduct is criminal. When they detect an instance of evasion. oreover. while significant.Corruption by tax officials is a serious problem for the tax administration in a huge number of underdeveloped countries . It is often considered that extent of evasion depends on the severity of punishment for evasion. deliberate falsification of records. InSwitzerland. many acts that would amount to criminal tax evasion in other countries are treated as civil matters. and institution of Pre Shipment Inspection (PSI) agencies .Tax administrations reso rt to various means for plugging in scope of evasion and increasing the level of enforcement. These include: y y y privatization of tax enforcement tax farming. not the criminal courts.

It has been suggested that tax farming may be a solution to the problem of tax evasion seen in developing countries.private entity for a fixed amount who then collects the revenue and shoulders the risk of attempts at evasion by the taxpayers. and are themselves unrestrained by "politics. for example. of a transaction is to enable tax advantages to be obtained. However. The obvious way to do this is to frame tax rules so that there is no scope for avoidance. goes into the "farm" and begins extracting "taxes" from citizens. or one of the main objects (or purposes ). but nowadays they regard it with increasing hostility. esponses to tax avoidance Avoidance also reduces government revenue and brings the tax system into disrepute. In the judiciary. A "tax farmer" buys a "franchise" by making pre payment to the government. so governments need to prevent tax avoidance or keep it within limits. judges in the nited Kingdom b efore the 197 s regarded tax avoidance with neutrality." then invested with the authority of the government. This is a system destined to be abusive as the "tax farmers" seek back their investment. or the perceived unfairness of the tax being avoided." PSI Agencies: Pre shipment Agencies like SGS. At titudes may vary depending on the steps taken in the avoidance scheme. Attitudes vary from approval through neutrality to outright hostility. . Cotecna etc. are employed to prevent evasion of customs duty through under invoicing and misdeclaration. or alternatively the right of every citizen to structure one's affairs in a manner allowed by law. in the recent times. different judges have taken different attitudes. allegations have been lodged that PSI agencies have actively cooperated with the importers in evading customs duties. The "tax farmer. plus profit. See the quotes below for examples. Governments have historically turned to tax farming for quick cash. legislation (known as "anti avoidance" provisions) apply to prevent tax avoidance where the main object (or purpose). to pay no more tax than what is required. Public opinion on tax avoidance Tax avoidance may be considered to b e the dodging of one's duties to society. In practice this has not proved achievable and has led to an ongoing battle between government s amending legislation and tax advisors' finding new scope for tax avoidance in the amended rules. As a generalization.

. The arguments against Tax esistance are that if in a democracy peo ple only funded those decisions which they go with then this would undermine the government. That the government has no legal right to a p erson's money and so tax amounts to slavery or theft. The government. if people resist paying taxes then the taxes would be left unpaid as a result of which the government would be forced to take money from other people. frivolous. Tax resistors have also opined that the government is wasteful and in efficient for it provides insufficient returns on the tax that is collected. penalties. Tax esistors realize that the law orders them to submit taxes but even then they resist paying taxes. They typically do not take the position that the tax laws are themselves illegal or do not apply to them (as tax protesters do) and they are mor e concerned with not paying for what they oppose than they are motivated by the desire to keep more of their mone y. There are various arguments for Tax esistance such as that the government is involved in destructive. Also. It has also been opined that individuals who do esistance of Tax are actually free riders who benefit from the various services of the government such as security and road infrastructure without paying their part of tax. immoral. any protesters continue posing the same arguments that the ederal courts have rejected time and time again.Tax protesters Some tax evaders believe that they have uncovered new interpretations of the law that show that they are not subject to being taxed (not liable): these individuals and groups are sometimes called tax protesters. urther. in order to check Tax esistance applies interest. ruling the arguments to be legally Tax resistance Tax resistance is the refusal to pay a tax for conscientious reasons (because the resister does not want to support the government or some of its activities). which would be unfair to them. the arguments against Tax esistance are that it is too ineffective and passive to bring about a political change. or fines against Tax esistors. The technique of esistance Tax is used by people who decide not to fund the violent activities of the government and it is also used by the people who follow the movements of non violent resistance. and unethical activities like capital punishment and war and so paying taxes will fund all these activities. urther. they also claimed that the government in power is illegal for they have come to power by unfair means. Another argument for Tax esistance is that the government that is in power is full of corruption for it serves only its own needs. nlike the protesters of tax who deny that they have the obligation to submit tax.

Various methods of Tax esistance: y y y y y y Paying tax under protest Tax avoidance edirection efusing to pay specific taxes Tax evasion educing income and expenditure Tax shelters Tax Shelters are programs under which individuals participate in order to lessen their amount of taxes irrespective of their financial status. The advantage of this kind of Tax Shelter is that the money is not taken out as tax and instead in the account is compounded until the withdrawal of the funds. There are some Tax Shelters which are legal and there are some which are illegal. the governments may also allow the individuals to make investments in their own retirement pension plan. The various types of legal Tax Shelters Retirement plan: etirement plan is a type of legal Tax Shelter that is used to lessen the burden of the pension funded systems of the government. These investments are made in oil drilling and mining companies in which the investors normally do not want to invest for these companies take many years before they can generate profit. In this type of Shelter Tax. real estate. Tax Shelters include investments in equipment leasing. The various types of illegal Tax Shelters y y inancing arrangements ffshore companies . So in order to encourage investors to make investments in these kinds of companies. breeding and cattle feeding programs. and gas and oil companies. the governments reward the investors with Tax Shelters by giving them instant savings on tax and also huge gains in case the company discovers oil or gold. In these kinds of retirement plans the income that is contributed will not be taxed at that point of time but will be taxed at the time of the retirement of the individual. Flow through partnerships that are limited: Another type of legal Tax Shelter is the flow through partnershi ps that are of limited nature.

.Financing arrangements: Financing arrangements is a kind of illegal Tax Shelter following which a person pays very high rates of interest to a party as a result of which the person can reduce from an investment the amount of income. But at the same time in the financing arrangements Tax Shelter the person makes huge gain of capital when he withdraws the financing investment. Offshore companies: Another type of illegal Tax Shelter is offshore companies under which the funds are transferred to a company which is located in a different country. ne may transfer the funds claiming that it is an expense and thus lower his income that is taxable.