Sunday, September 18, 2016

Types of tax evasion and tax avoidance schemes that fraudsters are commiting

 Tax evasion and tax avoidance schemes

tax evasion

There are many different types of tax evasion and tax avoidance schemes, and they will vary depending on what kinds of taxes exist in the jurisdiction. Some common types of tax evasion and tax avoidance schemes include:


Taxes on periodic income or wealth are a source of revenue for many governments, but fraudsters often commit tax evasion and tax avoidance by falsifying or omitting material information. Common forms of criminal income and wealth tax evasion and tax avoidance include:
  • Failing to submit a report of one’s taxable income, if such a report is required
  • Intentionally misrepresenting one’s income or wealth
  • Pretending to transfer assets to another person or entity to lower tax liability
  • Intentionally failing to withhold the taxable portion of an employee’s income, if so required
  • Failing to report foreign bank accounts or other taxable assets, if required
  • Falsely claiming income was earned in another jurisdiction to lower tax liability


In the context of income and wealth taxes, tax deductions are itemised expenses subtracted from gross income or assets to reduce the taxpayer’s total liability. For instance, a company that is taxed by a percentage of its gross sales might be allowed to deduct the cost of making the goods (materials, employee costs, etc.). Deductions are designed to make certain taxes fairer, but they also might be used inappropriately by tax evaders. Examples of the fraudulent use of deductions include:
  • Falsifying expenses, such as recording fictitious salaries to non-existent employees
  • Fraudulently inflating expenses, such as bribing a supplier to inflate an invoice
  • Submitting false information to qualify for improper deductions, such as pretending to qualify for a tax deduction for having children living at home
  • Misclassifying non-deductible expenses as deductible


Similar to deductions, tax credits are an amount subtracted from a person’s or entity’s tax liability, but are not necessarily tied to an expense. Additionally, some tax credits might result in a tax refund, if the credits are greater than the person’s total tax liability. For instance, a government might give tax credits to individuals with low income to reduce their tax liability.
Tax credits are often used to encourage certain behaviour, such as taxing carbon emissions by industrial companies. Taxpayers might attempt to evade taxes by misrepresenting their eligibility for a tax credit.


Consumption taxes are those collected from the proceeds of the sale of goods or services.
There are myriad ways to tax consumption. Some of the common taxes include:
  • Sales tax: a tax on goods or services, usually assessed at the consumer level and collected by the retailer or seller at the point of sale
  • Value-added tax (VAT): a system that imposes a tax on a single item at each point of sale along the item’s path from manufacture, to wholesale, to retailer, to consumer; the tax is collected by the seller in the transaction and only the difference between the price paid by the initial purchaser and the price paid by the subsequent purchaser is taxed
  • Excise tax: a tax on a narrow class of goods or services (e.g., tobacco or gasoline), usually assessed one time (per jurisdiction) at the manufacturer or wholesaler level.
As with any form of tax, there are common tax evasion and tax avoidance schemes by which fraudsters attempt to evade consumption taxes, including:
  • Omitting transactions from tax records to evade consumption taxes
  • Deflating the value of transactions in tax records (e.g., recording the portion of a transaction paid with a credit card, but not recording cash received for the same transaction)
  • Disguising a transaction that should be subject to a domestic consumption tax as a taxfree foreign transaction
  • Missing trader schemes, where the culprit collects a value-added tax from a large transaction, but, rather than paying the tax to the government, disappears with the proceeds
  • Applying for a refund of a value-added tax that the subject or a co-conspirator in the transaction chain never paid to the government (called a carousel scheme, because the goods are often transferred among the co-conspirators several times)
  • Smuggling goods into a jurisdiction to avoid paying excise taxes


A suspect or a criminal defendant might raise various defences to accusations of tax evasion and tax avoidance, and whether these defences are legitimate depends on the laws of the jurisdiction. The following are common defences to tax evasion and tax avoidance:
  • No tax deficiency: The defendant can establish that there is no deficiency. If there is no deficiency, there is no tax liability. This is generally the best defence, if available, because several other defences might negate wilfulness and remove criminal liability, but they do not necessarily eliminate tax liability, which may include interest and penalties.
  • Lack of wilfulness: Again, most criminal tax offences require wilful violations, but even if successfully raised, this defence might leave the defendant subject to non-criminal penalties.
  • Avoidance, not evasion: The taxpayer might argue that it engaged in legal means of lowering its tax bill through legitimate deductions, credits, and shelters. Establishing that the taxpayer was engaging in tax avoidance and not evasion provides a defence to tax fraud.
  • Reliance on an attorney or accountant: If a taxpayer properly relied on expert advice for the conduct in question, the jurisdiction might find no criminal liability
  • Mental illness and incapacity: Certain mental illnesses and incapacitating conditions will negate criminal intent.
Generally, some defences will be ineffective against charges for tax tax evasion and tax avoidance crimes. Taxes owed as a result of tax evasion and tax avoidance typically survive the death of the taxpayer, meaning the deceased’s estate will still be liable, and they may not be discharged in bankruptcy proceedings. If a person commits each element of a tax evasion and tax avoidance offence, amending fraudulent information held by the government will not generally relieve the taxpayer of criminal liability. Additionally, many jurisdictions extend or eliminate the statute of limitations or period for prescriptions for tax evasion and tax avoidance.


About Unknown -

Senior Manager and fraud examiner in mining industry. Head the investigations related to fraud. My role includes driving the culture of integrity And ethics within the Company by conducting regular fraud investigations.

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