What is a 'Tax Cheat'

A tax cheat is an individual or group who, through fraud, dishonesty or avoidance, does not pay the amount of tax that would be obligated if tax rules were properly followed.

BREAKING DOWN 'Tax Cheat'

A tax cheat may improperly use tax shelters or purposefully miscategorize earnings and expenses under the pretense that the government will not miss the lost revenue because of the obligation's size relative to all taxes collected. Those found to be cheating on their taxes may be subject to fines, penalties or imprisonment.

Tax cheats are a continual problem for The Internal Revenue Service, or the IRS, so the IRS does allow taxpayers to report individuals and organizations that they suspect are tax cheats. As an incentive to report any suspected tax fraud, the IRS even provides a potential reward if it is found that those being reported did, in fact, underpay taxes. Any individual or organization who is found guilty of cheating on or evading their taxes is also subject to penalties that range from minor fines of a penalty of 5 percent of the unpaid tax or more serious penalties, including a fine of $250,000 and five years in prison.

Examples of a Tax Cheat

There are many ways that an individual or organization may be classified as a tax cheat. Some tax cheaters may not even realize that they cheating on their taxes but do so inadvertently because they are not familiar with the tax rules surrounding their income or earning activities. Others purposefully attempt to evade taxes or tweak their income earnings in order to avoid paying taxes on their full profits. The website CNBC notes that some of the most common forms of tax cheating include:

  • Working on a cash-only basis and not reporting any cash income, thus not paying any taxes on that income earned.
  • Earning cash profits and failing to report full earnings in order to pay a lowered tax amount on cash profits.
  • Earning an income from an illegal or illicit activity and not reporting it or paying any tax on the money.
  • Overvaluing charitable donations. Some people may overestimate, again either inadvertently or on purpose, the value of their charitable non-cash contributions in order to bring their taxable income down and pay less taxes on it.
  • Failing to report tips on tax Form 4070, especially cash tips that may be easy to hide.
  • Paying employees under-the-table in cash and not reporting that income paid out.
  • Failing to report earnings or winnings from games, competitions or gambling.
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