How does tax evasion work?
In: Economics
It depends on what you mean – avoiding taxes through legal “loopholes” or criminal “tax evasion” that’s just breaking the law?
As to the later, there are many way, but the main thing is that the IRS only knows the information they are given. Your employer reports paying you, banks report your interest earned or payed, etc. But there are a lot of things the IRS doesn’t get any information about directly – instead, they ask you each year on your tax return.
And you… lie. Some lies are better than others, but we don’t need to get into that. You lie about an expense, or a loss, or unreported income, and calculate what the taxes you would owe would be if it were true, and only pay that amount.
It’s easier if you make money in cash, so it isn’t reported, or if you normally have a lot of expenses and can slip in a few extra fake ones.
Also, some people just… don’t pay. If it’s not a whole lot of money, the IRS might not bother doing anything about it for years.
One way or another you lie about the thing you did that is taxable. For instance, you can ask to be paid in cash so there is no evidence you were paid, and then not report the money you earned. Or, you could lie about the expenses you paid on your business, to write them off against your taxes. Or you could invest your money outside the country and not report capital gains. However you do it, it comes down to lying to the government to trick them into giving you a lower tax bill.
You probably mean company tax evasion, right?
Big international companies use something called [Base Erosion and Profit Shifting (BEPS)](https://en.wikipedia.org/wiki/Base_erosion_and_profit_shifting), where they transfer capital to tax havens (Profit Shifting) to make the amount of money they have to pay taxes on in the country where their headquarters are located (Base Erosion).
They can’t transfer money directly though, that would be too obvious. Instead, they transfer intellectual property like code, patents and licenses to a daughter company in a tax haven. Transfering intellectual property is free of all taxes and the main branch of the company now has to pay royalties on this intellectual property, thus shifting the money to the tax haven.
Apple has most of it’s money sitting in Ireland for tax reasons, even though it’s officially based in Cupertino, CA and the profits should be collected and taxed there.
I’ll only speak from experience. You get a tax liability when your employer doesn’t withhold or if you receive/file a self-employed 1040-misc tax return which assesses how much you owe based on how much you earned. If you “earned” $30,000 in 2019, your liability will probably be a lot, like $3,000 to $8,000 maybe. But if you make $30,0000 and claim a $30,000 loss, then in effect, you’ve “earned” $0 in 2019. (The secret is to reinvest into the business, misreport expenses, take advantage of tax incentives, etc). You can lease expensive cars every year, count meals, rounds of golf, pretty much anything is a loophole if you think long and hard enough. Giggity.
One way to make it work is to take money you made and make that money through a company that is based somewhere with weak laws. For example, in the US, you owe taxes on creative property. This is the case in every state except Rhode Island. So, Coca Cola has a subsidiary based in Rhode Island the owns their logos and colors, and they rent it from that company for like $1. In this way, Coca Cola avoids paying for that property, but still makes money liscencing it
You owe $500, and you only pay $300.
Sure, there are often other lies involved, like that fake expense you’re using to make the math check on the forms while only saying you owe $300, but it’s the underpaying, not the paperwork, that’s a crime.
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