Benjamin Franklin famously said the only two certainties in life are death and taxes. And science is making great strides on the death bit.
The US’s “voluntary” tax system means individuals are responsible for calculating the correct amount of tax on their income. So, it shouldn’t come as a surprise that avoiding tax liabilities is one of the most widespread crimes in the country.
How widespread? You’ll find out the answer to that and a whole lot more on this tax evasion statistics page. Put that return form aside for now and read on!
Top Ten Tax Avoidance Statistics:
- The United States did not have an officially ratified income tax until 1913.
- The IRS estimates the yearly tax gap in the US is $441 billion.
- Employment taxes have a 91% voluntary compliance rate in the US.
- The IRS paid out $120,305,278 in rewards to whistleblowers who decided to report tax fraud in 2019.
- In addition to a felony charge, tax evasion penalties in the USA can be as high as $500,000.
- Amazon’s effective tax rate in 2019 was a paltry 1.2%.
- US companies repatriated over $300 billion following the Tax Cuts and Jobs Act of 2018.
- General Motors has received over $450 million in tax refunds since 2009.
- The United Kingdom recovered $42 billion in 2018 by reducing tax corruption.
- The combined tax gap of the European Union countries is as high as a trillion dollars.
History of Tax Evasion — Statistics and Facts
People have been trying to avoid taxes since the very day taxes were legally introduced. And it’s usually the rich ones — here are the most famous examples.
1. Walter Anderson secluded around $365 million worth of income from the IRS.
(DOJ) (DOJ)
Walter C. Anderson pled guilty to two counts of federal tax evasion in 2006 for not reporting hundreds of millions of dollars of income on tax returns from 1998 and 1999. To this date, it is still the biggest tax fraud case for personal income tax in the history of the United States.
However, that record may soon be broken. In late 2020, the Department of Justice indicted tech-billionaire Robert Brockman for allegedly concealing close to $2 billion in income from tax oversight.
2. The infamous Chicago gangster, Al Capone, also faced tax evasion charges.
(FBI)
Al Capone’s case is one of the most widely known instances of a criminal jailed for tax crimes rather than for more serious offenses.
Reportedly, Al Capone was under the impression that the federal government couldn’t levy taxes on ill-gotten gains. He would later learn that the 16th Amendment makes no distinction between legal and illegal income.
When talking about tax evasion cases, this was also the first time the IRS used the net-worth method to determine the correct tax liabilities for an individual.
3. The United States did not have an officially ratified income tax until 1913.
(Our Documents)
Efforts to fund the Civil War resulted in a 3% income tax law in 1861, which applied to all incomes over $800.
Congress repealed the law in 1872, but it laid the groundwork for what would eventually become the 16th Amendment. Officially ratified in 1913, the 16th Amendment is the basis for the income tax we still observe today.
US Tax Evasion Statistics
Doing taxes is neither easy nor interesting, but has to be done. Still, there are a lot of people who keep finding ways to avoid this. Before you fill out your next tax form, here is what you should know about the American tax system.
4. The IRS estimates the yearly tax gap in the US is $441 billion.
(IRS)
The tax gap (the difference between actual liabilities and paid taxes over a period) in the US has remained roughly steady since 2018. The IRS gap estimates from tax years 2011, 2012, and 2014 are about the same as from 2008–2010.
Based on these estimates, the US tax system enjoys an 83.6% compliance rate. Despite this high rate, it’s still the largest tax gap of any single country.
5. 68.1% of tax fraud offenders in 2019 were male.
(USSC)
Of those, approximately half (48.2%) were White, based on fraud offenders sentenced in 2019. Some other key characteristics:
- Convicted offenders were 50 years old, on overage
- The vast majority (80.2%) had little or no previous criminal history
- 93.1% were United States citizens
6. Employment taxes have a 91% voluntary compliance rate in the US.
(IRS)
Tax avoidance rates differ based on the type of tax liability. People in the US seem to take employment taxes seriously because the IRS fails to collect merely 9% of these liabilities.
Individual income tax has the lowest compliance rate, based on IRS estimates from 2011–2013. Only 78% of personal income tax liabilities were voluntarily and correctly reported in that period.
7. The average jail time for tax evasion is 16 months.
(USSC) (IRS)
Although numerous sources list three to five years as an average sentence, none of them hold up to scrutiny. However, 33.2% of sentenced offenders received an average sentence reduction of about 69.9% from established guidelines.
Of the offenders sentenced for tax fraud accusations, 65% received jail time. And of those, 2.7% were convicted of an offense with a mandatory minimum penalty for tax evasion.
The maximum prison sentence for tax evasion is five years.
8. The IRS paid out $120,305,278 in rewards to whistleblowers who decided to report tax fraud in 2019.
(IRS)
The IRS’s Whistleblower Office allocates reward money to people who report a persons’ failure to pay taxes. The office can award up to 30% of the additional taxes collected as compensation to whistleblowers.
Tax evasion statistics show that the IRS awarded a total of $312,207,590 to 217 people in 2018. It’s a substantial amount, but it only represented 21.7% of the additional taxes and penalties the IRS collected in the same period.
9. In most federal tax fraud cases, the IRS has 3 years from the filing deadline to point out discrepancies.
(American Bar Association)
If the IRS audits your taxes too late, you may be off the hook even if you made a mistake or underreported. In the main, the IRS has a three-year statute of limitations from the filing date.
However, the statute goes up to six years for substantially underreported income. Usually, that implies more than 25% of gross income. Also, any offshore income of more than $5000 typically has a six-year statute.
And, if you never file a return or knowingly file a fraudulent return, you’re out of luck. The IRS can claim that the clock on the statute never started since the return was never filed appropriately.
10. The US Internal Revenue Service only audited 0.45% of individual tax returns in 2019.
(CNBC)
The number of tax audits has been falling for quite some time, and in 2019, they were at less than half of what they were in 2010 (1.11%). So the likelihood of any individual taxpayer getting audited was about 1 in 220.
The dip in audits corresponds to a similar decline in the IRS’s budget, which was about 20% lower in 2018 than it was in 2010.
But the audits aren’t distributed evenly across all income levels. IRS audit percentages for returns of individuals with income over $10 million was about 6.66% in 2018.
11. In addition to a felony charge, penalties for tax evasion in the USA can be as high as $500,000.
(IRS)
Note that any penalties the IRS imposes are in addition to other sanctions, jail time, and fines based on uncollected tax. Individuals cannot receive a fine greater than $100,000, but corporations can be fined as much as half a million dollars.
Corporate Tax Evasion Statistics
This is a controversial topic that emerges every year. How do the world’s biggest corporations pay low taxes and get away with it? Let’s find out more about this and many other intricacies attached to this issue.
12. Amazon’s effective tax rate in 2019 was a paltry 1.2%.
(Fox Business)
Amazon is the second-largest retailer in the world. And yet, it paid only $162 million in federal income taxes in 2019, avoiding 94% of its over $1 billion tax bill.
While this may seem like the most obvious case of tax dodging ever, it’s underpinned by entirely legal tax deferment strategies. To understand why it’s important to contrast tax avoidance vs evasion.
Amazon reinvests a large portion of its earnings and has been doing so for a long time. The result? A tax bill that appears dubious but falls within IRS guidelines.
13. Offshore tax avoidance statistics show that 52% of it takes place with the aid of just 10 jurisdictions.
(Tax Justice Network) (Michigan Law Review)
To avoid taxation, corporations and individuals often resort to what is known as tax havens. Tax havens are jurisdictions where tax liabilities are low and financial reporting guidelines are opaque.
The British Virgin Islands is the world’s most prolific tax haven and one of the ten responsible for more than half the world’s tax avoidance. It’s one of three British territories on the list — Bermuda and the Cayman Islands being the other two.
Forward-thinking individuals have even begun using cryptocurrencies as an avenue for tax evasion.
14. Governments lose between $500 and $600 billion a year to corporate tax evasion.
(IMF)
As of 2017, the 500 richest US corporations held approximately $2.6 trillion in offshore accounts. But corporations are only a part of the problem. Tax havens were home to $8.7 trillion belonging to individuals in the same period.
While the most significant tax fraud occurs in the largest economies, low-income and developing economies account for about $200 billion of lost tax revenue.
15. US companies repatriated over $300 billion following the Tax Cuts and Jobs Act of 2018.
(Federal Reserve)
Prior to the Tax Cuts and Jobs Act, US multinationals were subject to US taxes on foreign profits. However, those profits would only be taxed when repatriated (i.e., brought back to the United States).
To avoid tax evasion penalties, these firms routinely held capital in offshore accounts. However, due to transitioning to a new tax system, the Tax Cuts and Jobs Act introduced a one-time tax on offshore holdings, which incentivized firms to repatriate hundreds of billions of dollars in 2018.
16. Tax avoidance statistics revealed 91 companies in the Fortune 500 didn’t pay any federal income tax in 2018.
(CNBC)
By hook or by crook, a lot of companies are getting away with an effective tax rate of 0%. And despite the statutory corporate tax rate of 21% in the US, a report looking at 379 companies found an average effective tax rate of 11.3%.
Some highlights from the list that enjoys a 0% tax rate include:
- Netflix
- Nvidia
- Delta Air Lines
- FedEx
- Goodyear Tire & Rubber
Recently, the case of President Donald Trump and his tax fraud allegations brought to light how wealthy Americans take advantage of tax reduction loopholes.
17. General Motors has received over $450 million in tax refunds since 2009.
(Detroit Free Press)
Tax refunds are not uncommon for large corporations, but General Motors is a particular case. The company manages to receive tax refunds despite not paying any federal tax since 2009 and generating over $100 billion in profits over the period.
So that’s the secret? It’s not quite federal tax fraud.
For the most part, GM is offsetting profits with past losses. Plus, GM invests a lot of those profits, creating tax deductions.
Global Tax Avoidance and Tax Evasion Statistics
Now that we’ve seen what the situation is in the US, let’s see how the rest of the world compares when it comes to tax evasion, and what the consequences are.
18. Reporting a tax evader to the UK’s payment and customs authority could result in a reward of over $300,000 (£250,000).
(The Sun)
The IRS isn’t the only agency incentivizing people to blow the whistle on tax dodgers. If you report tax evasion to Her Majesty’s Revenue & Customs, and the information is actionable, you can expect a reward of around £5,000 (about $6,600).
However, HMRC reported most of the people who report tax dodgers don’t expect a reward. Plus, the mentioned $300,000 prize is reserved for those whose information helps with something a bit more “extreme,” like closing down a company, for example.
19. The United Kingdom recovered $42 billion in 2018 by reducing tax corruption.
(OCCRP)
Tax evasion statistics for the UK show that HMRC staged over 2,000 interventions into tax-dodging schemes and tax non-compliance. The efforts increased national tax revenue for FY 2018 by 3.6%.
An international exchange system, the Common Reporting Standard, revealed millions of accounts to HMRC. The accounts were tied to UK citizens with offshore interests and resulted in $3.6 billion of taxes collected.
20. The combined tax gap of European Union countries is as high as a trillion dollars.
(Socialists and Democrats)
Admittedly, the trillion-dollar figure is at the high end of a broad range. It could be as low as €750 billion ($888 billion).
Italy, France, and Germany are the most extensive tax evasion examples in absolute terms, and the percentages range from 7.98% for Luxembourg to 29.51% for Romania. However, the report also notes that only 15 of the member states regularly prepare tax gap estimates.
21. Underreporting accounted for 84% of the tax gap in the US between 2008 and 2010.
(Journalist’s Resource) (CPA Practice Advisor)
According to IRS tax fraud information, underreporting is the most common form of tax fudging.
Failing to report income is so prevalent that 32% of self-employed people in the US admit to under-reporting their taxable income.
22. Denmark has a capital gains tax of 42%, the highest in the world.
(Tax Foundation) (Tax Policy Center)
Not all countries levy a capital gains tax, which is a tax on income generated from stocks and other securities.
The United States has a relatively high marginal capital gains tax, but surprisingly few investors avoid the tax.
FAQ
How common is tax evasion?
Approximately 1 in 30 taxpayers engage in some form of tax evasion every year in the US.
The consequence of that evasion is a gross tax gap of $441 billion between 2011 and 2013. It was estimated that the IRS would eventually manage to collect about $60 billion, which still leaves a net tax gap of $381 billion for tax years 2011-2013.
(Vox) (IRS)
What happens when you report someone for tax evasion?
First, you’ll complete Form 3949-A, where you identify the person or business you’re reporting as well as provide identifying information for yourself. You’ll also have to declare the statement is accurate under penalty of perjury.
Once the IRS receives the form, they’ll use the information to undertake a preliminary analysis and determine if a crime occurred. That may lead to a criminal investigation and eventual prosecution.
These investigations can take many years, evidenced by the very public Trump tax fraud allegations and subsequent inquiries.
If the information you provide helps the IRS recover owed taxes, you may receive up to 30% of the additional taxes and penalties collected. To apply for this reward, you’ll need to complete and submit Form 211.
(How Stuff Works) (IRS)
Which country has the largest level of tax evasion?
Bulgaria is notoriously the country with the highest tax evasion rate.
In a study of tax evasion rates of 38 countries, Bulgaria had a tax evasion value of 3.9% of the total GDP between 1999 and 2010. Mexico was in second place with 3.8% of the GDP over the period.
In absolute terms, the United States loses the most revenue to tax evasion — $458 billion per year ($406 billion after the IRS takes action).
(Journalist’s Resource) (Research Gate)
How to report someone to the IRS?
Complete an information referral Form 3949-A with identifying information for the suspected perpetrator. Mail the completed form to:
Internal Revenue Service
PO Box 3801
Ogden, UT 84409
For more information on how to report fraud to the IRS, visit the IRS website.
(IRS)
How to report a business to the IRS for paying under the table?
Failing to report wages to avoid payroll taxes can have numerous consequences that involve both federal and state tax authorities.
If you suspect a business or employer is engaging in unreported employment, your best bet is to contact the Wage and Hour Division’s local office in your area. Each office has a mailing address and a toll-free phone line where you can request more information.
(Find Law)
What is the difference between tax avoidance and tax evasion?
The IRS defines tax avoidance as “an action taken to lessen tax liability and maximize after-tax income.” The implication is that tax avoidance is a legal activity wherein taxpayers take advantage of deductions, adjustments, and other tax-reducing resources.
A good example of tax avoidance is placing money in a retirement savings plan, such as a 401(k).
On the other hand, tax evasion is defined as “the failure to pay or a deliberate underpayment of taxes.” In that case, the taxpayer engages in illegal activities to avoid tax liabilities.
(IRS)
Conclusion
For as long as organized society has existed, some form of taxation has helped it move forward. Nevertheless, many people fundamentally disagree with taxation; or act in a way that makes it seem like they do.
But these tax evasion statistics show that despite evasion being relatively common, most Americans don’t feel that they’re taxed unfairly. The voluntary compliance system in the US produces better results than in many other countries.
So if you’re one of the vast majority of Americans doing the right thing this tax season, take comfort from knowing you’re in good company.
Sources:
- American Bar Association
- CNBC
- CNBC
- CPA Practice Advisor
- Detroit Free Press
- DOJ
- DOJ
- FBI
- Federal Reserve
- Find Law
- Fox Business
- How Stuff Works
- IMF
- IRS
- IRS
- IRS
- IRS
- IRS
- IRS
- IRS
- Journalist’s Resource
- OCCRP
- Our Documents
- Research Gate
- Socialists and Democrats
- Tax Foundation
- Tax Justice Network
- Tax Policy Center
- The Sun
- USSC
- Vox
