Tax Cheat: What It Is, How It Works, Examples

What Is a Tax Cheat?

The term "tax cheat" refers to an individual or group who fails to pay the tax required of them by law. Depending on the usage, the term may also refer to individuals who use aggressive tax avoidance strategies despite technically following the letter of the law.

Understanding a Tax Cheat

Governments rely on tax revenues to pay for expenses such as healthcare, policing, public education, traffic infrastructure, and the military. For many taxpayers, however, taxes represent a major expense, creating a strong incentive to reduce one's tax liability whenever possible.

While some programs allow taxpayers to reduce their taxes legally—for example, via contributing money into an employer-sponsored retirement plan such as a 401(k), other allowed deductions, or legitimate tax shelters—some people also use dodgy tax shelters and other illegal means in order to avoid paying taxes.

Any individual that employs the use of strategies to avoid paying taxes or paying fewer taxes than they should in an illegal way (or in a legal way that is considered unethical) is considered a tax cheat.

Stopping a Tax Cheat

Because tax revenues are essential for the government to fund its expenses, the Internal Revenue Service (IRS) has various programs designed to discourage, detect, and punish tax cheats. For example, the IRS has a program in place where whistleblowers can report individuals or companies that they suspect are cheating their taxes. As an incentive to report such fraud, the IRS offers a potential reward to the whistleblowers, paid if the report leads to a confirmed case of fraud.

The IRS also has the legal power to impose substantial penalties on tax cheats, including large fines and time in prison.

Sometimes, individuals may be cheating on their taxes without even being aware of doing so. This can arise because of the substantial complexity of modern tax law, which often requires professional accountants and lawyers to help advise individuals and companies on their true tax obligations.

To help avoid any accidental cheating, the IRS provides a range of online searchable resources for those wishing to educate themselves about the American tax system. Moreover, various popular software packages exist that can help guide people through the process of paying their taxes.

Examples of a Tax Cheat

There are many ways that an individual or organization may be classified as a tax cheat. For example, whether purposely or by accident, a person might work on a cash-only basis and refrain from declaring all or some of their income when they file their taxes each year.

If their employer did not keep accurate records of these cash payments, it may be impossible for the IRS to track these transactions. For example, if a worker was paid $500 a week but only reported that they were paid $250 a week, they would pay fewer taxes by providing this false information, making them a tax cheat.

Nevertheless, the failure to disclose the cash income would technically be an example of tax fraud, potentially making the tax cheat vulnerable to fines or other penalties were the individual caught.

Other examples of how tax cheating can occur include overstating the value of charitable donations in order to enjoy an inflated income tax deduction, paying employees "under the table" without proper payroll tax deductions, and failing to report gambling winnings or other windfall sums.