Is Keeping Bad Business Books a Federal Tax Crime?

Whether you live in California, New York, or somewhere in-between, an entrepreneurial approach is part of the American cultural DNA. Entrepreneurs who recognize business opportunities, plan carefully, work hard, and experience a little luck can build a business that is successful and profitable for decades or more. Through this type of sweat equity, an individual can improve their circumstances and find financial success.

However, some individuals may be overly eager to land their first client and start engaging in business operations prematurely. Other business owners may procrastinate regarding getting their books in order for months or years. Businesses in California and throughout the United States are subject to an array of tax obligations including income tax, sales tax, use tax, and employment taxes. Businesses that fail to satisfy these obligations can certainly face harsh financial consequences. Keeping poor records is one of the main ways companies can run into serious tax problems.

But can a failure to keep records, keeping inadequate records, or destroying business records lead to jail time for a business owner? Unfortunately for taxpayers who take action before getting their record-keeping in order, serious tax penalties up to and including a federal prison sentence can be imposed for failing to file taxes while having bad books and records. A tax attorney can help you assess the potential consequences and severity of the situation you face.

Business Owner Formed Shipping and Courier Company and Failed to Keep Business Records or Pay Taxes

In 1990, Carlo J. Marinello, II formed a trucking and courier company. The company provided services centered around transporting goods to and from the United States and Canada. From roughly 1992 through 2010, Marinello did not keep corporate records or books. Furthermore, Marinello failed to file personal or corporate income tax returns.

The reason for Marinello’s tax evasion? He says that he was entirely focused on building the company. This focus resulted in some serious tax mistakes like destroying bank statements. Marinello also commingled personal and business assets through the use of check cashing services.

Marinello did attempt to fix his tax mistakes to a certain degree. In 2005, he sought the advice of counsel. However, his subsequent actions may have made the problem worse. When faced with a recommendation to begin gathering bank and other financial documents, Marinello seemed to drag his feet for at least a year.

Other actions that were taken by Marinello undoubtedly had a negative impact on his case. When questioned by an IRS agent about non-filing he initially maintained that he did not file tax returns because he thought they were not required for persons who made less than $1,000 per year. While this is a misstatement of the law, honest mistakes can be explained to an extent — lies and statements made only to delay or obstruct an investigation simply cannot be explained away. Here, the taxpayer eventually admitted that his earnings did exceed even his mistaken interpretation of the law. He elaborated stating that the just “never got around to [filing taxes].”

How Can a Tax Non-Filer Face a Tax Evasion Conviction?

Individuals who do not file taxes can typically face an array of fines and monetary penalties for their failures. In this case, the taxpayer was convicted by a jury of committing one count of obstructing and impeding the due administration of the Internal Revenue Code, four counts of failing to file personal income tax returns, and four counts of failing to file corporate tax returns with the Internal Revenue Service. He will serve 36 months in prison and face other penalties for his acts.

However, taxpayers can also face tax evasion charges in a situation like this. While typically a criminal tax charge requires some type of action on the part of the taxpayer rather than a failure to take action, one evasion theory can include a tax non-filer. Thus, a common question we receive is often “How can taxpayer who failed to file taxes face a tax evasion charge?”

Under the Spies’ tax evasion theory, a person who fails to file taxes can face criminal tax liability and tax evasion charges based on their history of non-filing coupled with any attempt to disguise, conceal or avoid detection. In this case, prosecutors alleged that the taxpayer engaged in numerous actions to conceal his fraud. These actions include:

  • His or her failure to maintain books and records for his company.
  • The taxpayer’s failure to provide his accountant with complete and accurate statements regarding his and his company’s finances.
  • Improperly destroying or throwing away of business records.
  • Using a check cashing service to convert client payments to cash.
  • Concealing income through the use of alternate accounts and use of third-party nominees.
  • Payment of worker wages “under the table.”

Taxpayers who believe that they “haven’t done anything wrong aside from not filing taxes,” should reconsider this view in light of the conduct described above. Subsequent false statements you make to an IRS agent or auditor can themselves serve as the basis for a criminal tax prosecution if they are inaccurate and intended to mislead or obstruct.

Facing Tax Charges due to a Failure to File Taxes?

If you are facing a federal or state tax audit, criminal tax investigation or other collection proceedings surrounding a failure to file taxes, and getting questioned about your tax compliance failures you face a situation with at best the potential to impose huge monetary fines and at worst, a possible criminal prosecution. The Tax Lawyers, CPAs and EAs of the Tax Law Offices of David W. Klasing can help protect taxpayers and mitigate the civil and criminal tax consequences they face. To schedule a confidential, reduced rate initial consultation, please call our Los Angeles or Irvine firm at 800-681-1295 or schedule an appointment online today.