Despite the acclaimed high-tax morale of the Americans, the latest tax evasion statistics show a substantial change in course. The recent budget cuts in the IRS have spurred many to take their chances with their tax filings. Yet, we’re getting ahead of ourselves.
What is tax evasion? What is tax fraud? And how does the IRS tell the difference between these two charges?
In this article, we’ll answer this and more with our most important stats and facts on this topic, including tax evasion on a much grander scale — aka tax havens.
Top 10 Facts & Tax Evasion Statistics for 2021
- The British Virgin Islands is the world’s leading tax haven.
- 95% of all federal revenue in the US is collected in taxes.
- There were 494 tax fraud offenders in the US in 2019.
- The annual “tax gap” consists of approximately $441 billion.
- In 2021, the IRS plans to increase small business audits by 50%.
- The US accounts for the largest annual corporate tax evasion on the planet.
- Between April and May 2019 and 2020, the IRS initiated 19,570 audits on corporations, employment, and individuals.
- American taxpayers were sent 219,690,460 million non-audit notices via mail.
- In 2019, 65% of tax fraud offenders were sentenced to prison.
- The average jail time in the US due to tax evasion is somewhere between 3 and 5 years.
If you want to find out more about Americans’ most disliked civic duty, keep on reading.
Tax Havens & Global Tax Evasion Statistics
Which country is the world’s leading tax haven, and how much money is lost due to avoiding taxes?
Let’s find out!
1. Approximately $21 to $32 trillion is sitting in tax havens around the world.
(Tax Justice Network) (EC Europa)
What’s more, according to the latest executive summary of the EU, tax havens hold 10.4% of the global GDP and the figure is rising.
2. The British Virgin Islands is the world’s leading tax haven, tax statistics from 2019 reveal.
(Business Insider) (OFC Meter)
It’s no secret that tax dodgers around the globe are relocating their earnings to so-called offshore financial centers (OFCs), located on remote islands with limited jurisdiction and taxes.
The British Virgin Islands are the world’s top tax haven, absorbing 5,235 times more in value than a country of its size could possibly hold. Next in line are Taiwan (2,278) and Jersey (one of the Channel Islands), with an estimated 397 times higher economic value.
All of these, along with the Bermuda and Cayman Islands, as well as Samoa, are blacklisted by the EU and labeled as tax havens.
3. There are two types of tax evasion — evasion of assessment and evasion of payment.
What’s the main difference between the two?
In short, evasion of assessment refers to the taxpayer who needs to find a way to defeat the tax assessment. In contrast, evasion of payment refers to concealing assets, usually in a bank account that belongs to a family member.
4. Causes of tax evasion include inflation, tax pressure, and tax havens.
Although the causes will be different for each country, some of the most common reasons for tax evasion are:
- The structure of the country’s tax system
- Lack of accuracy of the tax legislation
- Population with lower education
- Tax pressure
- AATT’s inefficiency
- Tax havens
- Informal economy
- Tax incentives
5. The US accounted for the largest annual corporate tax loss on the planet.
Is tax evasion serious? Yes, definitely! Particularly in the US.
Namely, each corporate tax evader in the US contributed to the annual $188.8 billion in losses in 2017, which was the biggest sum reported on a global scale.
In comparison, China had an annual tax evasion loss of “just” $66.8 billion, a far better score than the US.
6. Each year $427 billion is lost to tax avoidance globally.
(Tax Justice Network) (Tax Justice Network)
Countries lose a large amount of money in tax due to private tax evasions and international corporate tax abuse. In fact, out of the $427 billion, $245 billion is associated with corporate tax abuse by multinational corporations, whereas $182 billion is linked to private tax evasion.
What’s more, corporate tax evasion statistics report multinational corporations transferred $1.38 trillion to other countries where the tax rates are low (or they don’t exist), whereas private tax evaders transferred more than $10 trillion.
7. When it comes to Europe, London is the epicenter of the global tax haven systems.
London is the tax haven capital, especially for non-Brits. In essence, both large and small companies use London bank’s low corporate tax of 19%.
Germany is the second-best country for foreign investors because their income is not eligible for taxation. Ireland, Jersey, and The Netherlands, also have lower taxes on interest and licensing income.
Tax Evasion in the USA
What do Americans think of tax evasion, and how much money do they lose annually due to evasions?
8. 95% of all federal revenue in the US is collected in taxes.
With around $3.5 trillion collected on an annual level, the IRS is responsible for generating 95% of federal revenue — a responsibility they are not taking lightly.
The IRS also took steps in FY 2018 to begin implementing the Tax Cuts and Jobs Act — the December 2017 legislation that reflected the most sweeping set of changes in the US tax system in more than 30 years.
9. Tax fraud statistics show there were 494 tax fraud cases in the US in 2019.
68.1% of offenders were men, of which 48.2% were White, 32.6% were Black, and 13.3% were Hispanic. The median age of the offenders was 50 years, and the average loss for the mentioned offenses was $296,429.
10. The US has one of the highest voluntary compliance rates (VCR) when it comes to paying taxes, tax evasion statistics reveal.
88% of Americans believe that tax evasion is not acceptable, and their voluntary compliance rate (VCR) — describing their willingness to pay their income taxes — ranges from 81% to 84%.
In comparison, the average VCR of Germany — the biggest economy in Europe — was estimated at merely 68%.
The VCR of other countries is even lower. For example, in Italy, there was an estimated 62%. In Greece, almost half of the households don’t pay any income taxes at all.
11. The annual “tax gap” consists of approximately $441 billion, US tax evasion statistics confirm.
(Tax Policy Center)
IRS estimations for the 2011–2013 period in the US show that an average of $441 billion is owed to the federal government in taxes per annum. A figure that’s also known as the “tax gap.”
The IRS managed to recover $60 billion via enforcement and voluntary late payments.
Furthermore, underreporting made approximately 70% of the tax gap, followed by underreported individual income tax (45%), corporate income tax (11%), and estate tax (0.3%).
12. Corporate tax evasion examples reveal some of the biggest US businesses hid $1.4 trillion in tax havens.
Namely, the biggest US corporations, including General Motors, Bank of America, and Apple, were found placing billions of dollars in offshore accounts, even though most of them received substantial federal taxpayer support, sometimes counting in the billions.
IRS Audits & Penalties
How does the IRS deal with tax fraud offenders, and what are the penalties for evading taxes?
13. IRS audit percentages dropped to 0.51% in 2018.
(Accounting Today) (CNBC)
The American institution responsible for controlling tax payments, the US Internal Revenue Service (IRS), has drastically reduced audit rates in the past decade, from 0.93% in 2010 to 0.51% in 2018. Mainly due to the lack of resources for conducting audits during this period.
Namely, there was a 28% IRS audit budget cut, plummeting the number of audits, with only 991,168 audits conducted in 2018, almost half of the number of tax audits conducted in 2010 (1.735 million).
14. In 2021, the IRS plans to increase small business audits by 50%, according to the latest IRS tax evasion statistics.
Although this sounds like bad news, small business auditing rates are pretty low.
For example, in 2019, the IRS managed to examine merely 0.5% of small corporate income tax returns — 7,478 of the 4,223,801 partnership returns that were filed in 2018 — and 10,065 of the 5,106,450 S corporation tax returns from 2018.
15. Between April and May 2019 and 2020, the IRS initiated 19,570 audits on corporations, employment, and individuals.
According to the latest tax evasion statistics, due to the pandemic, there has been a 65% decrease in IRS audits in the period between April and May of 2019 and 2020.
Corporate audits witnessed a significant drop in the number of audits (from 2,445 audits in 2019 to 716 audits in 2020), as did the individuals (from 14,188 in 2019 to 5,013 in 2020) and employers (from 1,185 in 2019 to 683 in 2020).
16. Tax evasion penalties could cost up to $250,000 for individuals and $500,000 for corporations.
(FindLaw) (Criminal Defense Lawyer)
Besides paying a high amount of money ($250,000 for individuals and $500,000 for corporations), other tax penalties include:
- paying for interest
- facing criminal charges
- losing your property
- going to prison
- losing your social security benefits
- damaging your credit rating
- losing your passport
17. $85,400 was the average amount owed in tax evasion cases in 2018.
Even though IRS field audits consisted of just 25% of all audits conducted in 2018, data shows that they were efficient enough, targeting the right taxpayers.
The average tax evader that underwent a field audit in 2018 owed $85,400 in taxes. In contrast, according to the IRS fraud report, tax dodgers discovered by mail audits owed just $7,000, on average.
In addition, the average amount owed for a CP2000 notice in 2018 was $1,773.
18. According to the latest IRS investigations, an average taxpayer is three times more likely to go through CP2000 than an IRS audit.
Even though this automated process is less frequent than in previous years, CP2000 — the automated underreported notice — is still more frequently used to detect inaccuracies between the IRS information on returns and filed returns.
As a result, any CP2000 discrepancies can lead to a penalty.
19. American taxpayers were sent 219,690,460 non-audit notices via mail, tax evasion statistics reveal.
Maintaining discipline in tax-paying with a lower budget led the IRS to issue an enormous number of non-audit mail notices, reaching over 200 million over the past few years.
Nevertheless, the rate of undeliverable mail from 2018 through June 2019 was lower by 1% since 2016, with some 6.6% notices not resulting in an answer.
20. Accuracy-related tax evasion cases in 2018 resulted in 606,121 penalties.
Despite the lower numbers of audits, in 2018, more than half a million Americans were given a penalty due to inaccuracies in their tax return claims.
This is a ten-fold increase from 2005 when merely 58,366 individuals earned penalties.
The CP2000 notices represented the biggest danger for taxpayers since most of the discrepancies in 2018 were detected this way.
21. The IRS launched a total of 1,598 criminal investigations for tax crimes in FY 2020.
Despite the ongoing pandemic, in 2020, the IRS CI division identified $2.3 billion in tax fraud. However, there was a slight decline in numbers, compared to the previous year.
For example, the IRS CI division initiated 140 investigations, 23 less than in 2019 (163 investigations). In addition, there was a decline in prosecution recommendations (145 vs. 203), there were fewer indictments (128 vs. 138), as well as fewer prison sentences.
In contrast, there was an increase in the incarceration rate, from 78% in 2019 and 2018 to 80% in 2020.
22. The average jail time for tax evasion in the US is somewhere between 3 and 5 years.
(Golding Lawyers) (Leonard Tax Law)
Unlike tax fraud, where the reported figures are merely incorrect, tax evasion involves intentionally concealing income, assets, deductions, and therefore is subject to a heavier jail sentence of up to 5 years in prison and/or a fine of up to $250,000, plus prosecution expenses.
23. In 2019, 65% of tax fraud offenders were sentenced to prison.
Only 2.7% got a mandatory minimum penalty. As the average tax evasion jail time is around 3 to 5 years, this is a serious matter. That said, in 2019, the average prison sentence amounted to just 16 months.
Last but not least, 93.1% of fraud offenders were American citizens, and 80.2% had a little to no criminal history beforehand.
How many taxpayers in the US are there?
As of October 2020, there are around 71,761,000 taxpayers in the US.
California is the state with the highest personal income taxes — 13.3%, followed by Hawaii (11%), New Jersey (10.75%), Oregon (9.9%), and Minnesota (9.85%).
On the other hand, if you live in Wyoming, Washington, Texas, South Dakota, Nevada, Florida, or Alaska, you won’t have to pay personal income taxes.
What percentage of income goes to taxes?
For an income of $0–$9,950, you’ll pay a 10% tax rate. If you have an income between $9,951 and $40,525, you pay 12%. Individuals with an income of $40,526–$86,375 pay 22%, whereas people with an average income of $86,376–$164,925 pay 24%.
32% is the tax rate for individuals that earn $164,926–$209,425. Those with an income between $209,426 and $523,600 will pay 35%. Individuals that make over $523,601 will pay the highest tax rate — 37%.
Can you go to jail for not paying taxes?
Not paying taxes can send you to jail and Al Capone is one of the best historical examples. Not paying taxes is considered a tax fraud, which is a maximum of five years in prison, and/or a fine of up to $250,000 for individuals, and $500,000 in the case of corporations (including the costs of prosecution).
However, depending on the circumstances under which the taxpayer failed to pay taxes, the IRS may decide to initiate a civil investigation instead of a criminal one.
Is tax evasion a felony?
Tax evasion is defined in IRC 7201 as a crime. If the US government proves “beyond a reasonable doubt” that the individual (or corporation) evaded paying taxes, the consequences will be dire.
Individuals (or corporations) that get convicted for tax evasion will have to pay fines which can go up to $100,000, i.e., $500,000 for corporations. Moreover, they will have to pay the cost of prosecution, and they could end up in jail for a maximum of five years.
How common is tax evasion?
The most common tax evasion is underreporting, in short, not reporting your income to the IRS or claiming more deductions. 80% of the tax gap is due to underreporting of income. Individuals are more likely to underreport than corporations.
Tax evasion is most common in workplaces that deal with cash payments since there are no paper trails. The IRS believes that about 84% of waiters and waitresses underreport their tips.
What percentage of tax evaders get caught?
When it comes to criminal charges, the IRS investigates less than 2% of tax frauds, and only 20% of tax fraud offenders face criminal tax charges.
For example, only 494 tax fraud offenders were caught in 2019, and 65% were sentenced to prison. What’s more, 80.2% of the offenders had little or no previous criminal history.
How much money does the US lose to tax evasion?
According to the IRS, for the 2011–2013 period, $441 billion per annum was lost, on average, due to tax fraud and tax evasion.
Therefore, the IRS plans to increase small business audits by 50% during 2021. However, the chances of being audited are pretty small — 1 in 260. The IRS audits only 0.4% of tax returns.
Who goes to jail for tax evasion?
Usually, the IRS files for criminal prosecution in cases where taxpayers are fully aware of the amount of taxes they owe but deliberately try to conceal it.
In the cases where the taxpayers are for some reason unable to pay their taxes — hence the difference between tax avoidance and evasion charges — the IRS is more compliant and understanding.
Who commits the most tax evasion?
When it comes to race and gender, white men are more likely to become tax fraud offenders. Based on the 2019 data, men made 68.1% of tax fraud offenders that year. 48.2% of offenders were White, 32.6% were Black, 13.3% were Hispanic, and 5.9% identified as “Other.”
Their average age of tax fraud offenders was 50 years. 93.1% of them were US citizens.
Regarding the districts, most offenders came from the Southern District of Florida (23), followed by the District of New Jersey (22) and the Southern District of New York (21). Eastern District of Pennsylvania (19) and Eastern District of New York (17) had the smallest number of offenders.
How to report tax evasion?
When someone wants to report fraud to the IRS or wishes to report tax evasion, they can do it in several different ways:
- By downloading a 3949-A form from the IRS website, printing it, filling it, and mailing it to the IRS office.
- By ordering the form via mail, filling it, and returning it to the IRS.
- By sending a letter to the IRS office containing as much information as possible on the tax offender, along with their personal contact information.
- By calling the tax fraud hotline.
- By filling the form 211 if you want to claim a reward for outing a tax evader.
What happens when you report someone for tax evasion?
After processing the allegations, the IRS confides the case to an IRS special agent for further investigation.
Whistle-blowers can get 15% to 30% of the amount collected if the involved amount is more than $2 million (in the case of businesses) or if the accused earns more than $200,000 annually.
As inevitable as taxes may seem, national tendencies toward fraud are accelerating.
Nevertheless, the government still has a few perks under its sleeves, like the whistleblower program and civic prosecutions with which they can easily detect and punish tax frauds even with smaller budget spending.
Unfortunately, tax evasion statistics can attest that this is not always the case for tax evasion on a much larger scale.
- Accounting Today
- Accounting Today
- Business Insider
- Criminal Defense Lawyer
- EC Europa
- Golding Lawyers
- Gross Mendelsohn
- How Stuff Works
- HR Block
- Leonard Tax Law
- NY Times
- OFC Meter
- Tax Justice Network
- Tax Justice Network
- Tax Policy Center
- The Atlantic
- The Balance
- Turbo Tax
- USA Today