this is how cram schools get in trouble almost every time, and its not specifically about foreigners, there are plenty of illegal taiwanese teachers/buxiban owners as well. from what i was told by my old boss, youre not suppose to have kindergarten and anxingban (sp?) in the same spot, the same owner can own 2 but need to register at 2 different addresses. so most owners register their actual school for one of the 2 and register their home for the other but run both from the same building.
as for taxes, i think there are fewer that actually pay tax in taiwan than there are that dont.
right or wrong, iots common, and the worst seems to be a fine and deportation which can mean different things to different people. someone who has setup their life well here getting deported would suck, but then they are probably not risking as much as a new graduate with a 1-2 year plan in asia.