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.
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