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2.4. TAX FRAUD AND EVASION: INTERNATIONAL PERCEPTIONS
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Moreover, the dividing line between illegal tax evasion and legal tax avoidance is blurred. Under US law, tax evasion refers to a situation where a person, through the commission of fraud, unlawfully pays less tax than the law mandates (Siegel, 2011:326).
In the US, tax evasion is deemed a criminal offense under federal and state statutes and a person who is found guilty of this crime is subjected to a prison sentence or a fine, or both. An overt act is necessary to give rise to the crime of income tax evasion; therefore, the government must prove wilfulness and an affirmative act that was intended to mislead. Some tax understatement is, however, an inadvertent error that may be due to ignorance of or confusion about the tax law (as is some overpayment of taxes). According to Siegel (2011:326), the theoretical models on this crime generally refer to wilful understatement of tax liability, and empirical analyses cannot precisely identify the taxpayers’ intent and therefore cannot precisely separate the wilful from the inadvertent; neither can they, in complicated areas of the tax law, precisely distinguish the illegal from the legal.
In what follows when discussing empirical estimates, the author uses the term that generated the estimates employed. The term ‘evasion’ is used in a discussion of the theoretical treatments of wilful non-compliance (Slemrod, 2007:n.p.).
One intriguing question is: How does the level of noncompliance, and its proportion to income, vary by income class? Somewhat surprisingly, little could be discerned about this from the IRS tax gap studies. Christian (1994:n.p.) wrote a report based on the 1988 TCMP study in which he stated the following:
“Higher-income people evade less than those with lower incomes, relative to the size of their true income; indeed, according to this study those with adjusted gross income above
$500,000 on average reported 97.1 percent of their true incomes to the IRS, compared to just 78.7 percent for those with adjusted gross income between $5,000 and $10,000. This pattern appears consistent with the old saying among tax professionals that “the poor evade and the rich avoid, simply translated to the fact that that “the rich tend to reduce their taxes through legal - avoidance - measures such as tax shelters, while those with lower incomes attempt more outright evasion”(Slemrod, 2007:n.p.).
38 2.4.3 South Africa
In the South African context, tax evasion and tax fraud are two of the most sinister forms of crime, as millions of Rands are side-tracked by tax criminals. The studies that were consulted indicate that it is not unusual for about half of possible tax revenues to remain uncollected (Venter, 2011:2). Tax fraud thus negatively impacts both public finances and the long-term sustainability of economic, social and environmental projects. The cost of tax fraud on the community “has sparked a growing awareness of not only the origins of current debt crises, but also of the scale of corruption in states which fail to effectively challenge the privileged (Hofmeyr, 2013:33).
Determining the nature and extent of tax fraud is fraught with challenges due to the dominating power of fraudsters and tax evaders who are motivated solely by the rationale of wealth and acquisition in which capital ownership confers power over capital (Compin, 2015:n.p.). Tax fraud inevitably relies on the existence of non-cooperative territories or tax havens.
The fight against tax havens is not straightforward because the issuer of the norm often embraces the aspirations of the norm transgressor. Therefore, tax fraud is categorically condemned as a deliberate, often criminal violation of the tax laws and threatens social cohesion.
The extent of unpaid taxes resulting from a blatant flouting of the law represents a serious loss of revenue for the state and local authorities (Gilligan & Richardson, 2005:134). Orewa (1957:n.p.) investigated the characteristics of tax evasion. This study found that “a high degree of inter- district mobility is the main reason of tax evasion on the part of taxpayers”. They also argue that the mobility of wage earners, salaried persons and self-employed persons with permanent and known addresses is a factor that facilitates tax evasion because these people keep moving from one place to another in order to earn legal money. The latter authors also found forms of partial evasion, such as when illiterate persons present only their salaries and wages as taxable income, and traders maintain inadequate records. Dlamini (2011:10) highlights that, in practice, this includes “falsifying of financial statement, not disclosing or misrepresenting relevant information in a tax return, or deliberate failure by a cash business to report the full amount of revenue received”. Tax evasion constitutes fraud, which is a criminal offence.
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Balter (1993) in Wright and Miller (2005:1635) suggests that three factors must be present in order for tax fraud to occur, namely:
• The end to be achieved- the payment of less tax than is legally due;
• A state of mind that is variously described as ‘evil’, operating ‘in bad faith’, deliberate and not accidental, or ‘wilful’; and
• An overt act aimed to achieve the non-payment of taxes known to be due.
Tax evasion is regarded as the most serious form of tax fraud in South Africa and is demarcated to a practice involving intentionally paying less of one’s own tax bill than is legally required through the understatement of tax liability. This can occur by either knowingly claiming underserved tax deduction or by underreporting taxable income. Tax avoidance is at the other end of the tax fraud continuum and infers behaviour that may or may not be legal but ultimately lacks the intent to fraudulently misrepresent tax liability. Tax evasion may represent a strategy for deferring the payment of taxes until some later point in time when taxes owed are detected or when the taxpayer has the means and motivation to pay his or her taxes due (Wright & Miller, 2005:1635).
2.5. TAX ADMINISTRATION PRIVILEGES: THE PRINCIPLES OF NON-