What Happens If I Don’t Pay My Taxes? Tax Evasion Penalties Every Taxpayer Must Know
It’s easy to disregard your tax obligations when you’d rather focus on running your business or earning more from your freelance gigs. Not to mention that it’s hard to part away with your hard-earned money, and you aren’t sure whether the government will put it to good use if you pay taxes.
Filing and paying taxes in the Philippines can be really daunting and stressful. But that’s nothing if you compare it to the troubles you might encounter if you don’t pay your taxes. Tax evasion penalties are something you wouldn’t want to deal with.
Avoid taxation woes that may hurt your finances. Understand what tax evasion is, its consequences, and how you can avoid it.
Table of Contents
- What is Tax Evasion?
- Tax Evasion vs Tax Avoidance: What’s the Difference?
- Tax Evasion Penalties in the Philippines
- How to Avoid Tax Evasion
- Final Thoughts
What is Tax Evasion?
Tax evasion happens when a person intentionally avoids paying any tax under the Tax Code of the Philippines. Because tax evasion is a criminal offense, tax evaders are subject to serious penalties and criminal charges.
Tax Evasion Examples
According to the BIR, the following forms of tax evasion are considered criminal liabilities under the Tax Code:
- Failure to pay taxes
- Non-filing of appropriate tax returns
- Over-declaring expenses/deductions
- Under-declaring income
- Hiding or transferring income
- Claiming personal expenses as business expenses (for tax shield)
- Failure to remit withholding taxes
- Failure to register with the BIR
- Having more than one book of accounts
- Fake entries in financial books and records
- Using fake accountable forms
Even if you’re exempted from paying taxes, you’re still required to file an income tax return (ITR). Otherwise, this is considered tax evasion.
Read more: How to File an Income Tax Return in the Philippines: Guide for Freelancers and Entrepreneurs
Tax Evasion vs Tax Avoidance: What’s the Difference?
Tax evasion and tax avoidance don’t mean the same thing. Tax evasion uses illegal or fraudulent methods to reduce or avoid taxes (see the list of tax evasion examples above), while tax avoidance uses lawful means to minimize tax payments.
Among the familiar examples of tax avoidance in the Philippines are the de minimis benefits that employers use to lower withholding taxes and increase the take-home pay of their employees.
While both tax evasion and tax avoidance lead to reduced taxes, the former can land a person in jail because of its criminal nature.
Tax Evasion Penalties in the Philippines
Evading taxes is avoiding your responsibility as a citizen of this country. By principle, we all know that taxes are used to improve the lives of Filipinos—from building schools, roads, and other infrastructure to providing health care services to less-privileged communities.
In short, failure to pay taxes somehow deprives Filipinos of the government services they’re supposed to enjoy. This is why the government imposes heavy penalties to tax evaders.
Let’s go through each tax evasion penalty that may apply if you fail to pay your taxes.
1. Surcharge of 25% or 50% of the Tax Due
This tax evasion penalty is a one-time fee for every instance of non-payment of tax.
The Tax Code imposes a 25% penalty to those who fail to file and/or pay the tax due on time (within the April 15 deadline), as well as those who file their ITR with the wrong revenue district office (RDO).
A higher surcharge of 50% of the tax due applies to cases in which there’s a deliberate failure to file the tax return or willful falsification of tax returns.
2. Annual Interest of 20% on Unpaid Tax
If you fail to pay your tax in full, you’ll be penalized with a 20% interest per year on the unpaid tax amount from the time it’s supposed to be paid until it’s completely paid.
So let’s say you don’t pay your tax in full for five years. You’ll end up paying twice as much as the original tax amount (Multiply 20% by five years, and you’ll get 100%).
3. Criminal Case and Imprisonment
“Will I be jailed for not paying my taxes?”
Imprisonment of two to four years is a possibility for tax evaders in the Philippines, especially the high-profile ones (e.g., celebrities, politicians, and other famous personalities).
In addition, there’s a fine ranging from PHP 30,000 to PHP 100,000 depending on the severity of the tax evasion case.
These sanctions are imposed to Filipinos who are found guilty of evading their tax payment altogether. On top of these, the BIR may file civil cases against tax evaders.
4. Compromise Penalties of up to P50,000
Rather than file tax evasion cases or criminal charges, the BIR may instead impose a compromise penalty to violators who fail to pay their taxes.
Compromise penalties for unsettled tax payments range from PHP 200 to PHP 50,000, depending on the amount of unpaid tax. The higher the unpaid tax amount is, the higher the compromise fee that the violator has to pay to the government.
5. Temporary Business Closure
The BIR also runs after tax-delinquent businesses under its Oplan Kandado program. The government’s revenue collection agency has the authority to suspend or close down a business establishment until it pays the right taxes.
Grounds for temporary closure of business under Oplan Kandado include the following:
- Failure to issue receipts or invoices
- Failure to file a value-added tax (VAT) return
- Under-declaring taxable sales by 30% or more
- Failure to register a business with the BIR
How to Avoid Tax Evasion
The consequences of tax evasion in the Philippines are severe. They can adversely affect your finances and cause so much anxiety.
What can you do—within the bounds of law—to avoid the risk? Taxation experts and lawyers recommend taxpayers to take the following steps:
- Be knowledgeable about the tax laws in the Philippines
- Stay updated on new tax rules and regulations
- Consider hiring a tax specialist or consultant, if you can afford it
- Closely monitor all receipts and transactions to make sure that each sale has a receipt and all receipts or invoices match the declared gross revenue
Don’t take taxes lightly. To avoid tax evasion penalties, be sure to pay the right taxes on time. You can pay BIR online. Let’s do our share in helping our fellow Filipinos receive the kind of services they’re entitled to through the taxes we pay.
With a goal to help Filipinos lead healthier financial lives, Moneymax regularly publishes tips and tricks on personal finance and lifestyle, among many other topics. For more finance-related news and articles, follow Moneymax on Linkedin.