Profit from a Crime? Better Report the Proceeds as Taxable Income

When most Americans think of taxable income, we think of wages that are earned from a job or perhaps money that represents proceeds from a sale of property. But what many of us fail to recognize is that even monies that are procured in an illegal manner are includible in a taxpayer’s gross income for the year which it was acquired. Thus, a bank robber would be breaking the tax law if he or she failed to include the proceeds from the heist in his gross income in the year that he or she robbed the bank. Although most cases aren’t as dramatic as the example above, being charged with tax fraud due to an intentional under-reporting can yield harsh consequences such as a lengthy federal prison sentence or financially-crippling back-taxes, penalties, and fines. A recent story out of Knoxville, Tennessee involves a well-known politician and his prosecution for failing to report income made in a manner that fell short of being legal.

According to several news reports, Joe Armstrong, a State representative in Tennessee, was charged and arraigned last year on three counts of tax fraud. Authorities allege that Armstrong took out a bank loan and purchased boatloads of cigarette tax stamps for $0.20 a piece. He then used his position as a policy maker to raise cigarette taxes nearly three times, which drove the value of the tax stamps to over $0.60 each. Finally, after selling the appreciated tax stamps, Armstrong failed to report any of the over $400,000 in gain on his individual taxes.

The act of buying tax stamps and selling them for a profit is not illegal. But federal law places restrictions on how many may be purchased. Additionally, the indictment places great emphasis on the actions taken by Armstrong and his alleged co-conspirator to hide their activity. According to the indictment, an accountant agreed to hold the proceeds from their scheme in an account owned by Bowling Branch Investments Inc., the sham entity allegedly created for the cigarette stamp tax reselling scheme.

After an investigation by the IRS Criminal Investigation Division and other government authorities, a grand jury indictment was procured and charges were filed. Armstrong was released after the arraignment last year and is currently awaiting trial. If convicted, he faces up to five years in a federal prison and could be ordered to pay back the over $100,000 that the IRS claims is owed. Further, he could face a fine of up to $250,000.

The Importance of Consulting with a Tax Attorney at the First Sign of Trouble

Taxpayers who are being investigated for any tax matter should contact an experienced tax attorney as soon as possible. The need to seek competent representation is multiplied when the there is a possibility of jail time or a large penalty. Many taxpayers fail to obtain counsel until it is too late. Some of those who are audited or being investigated believe that that they will be able to talk their way out of their situation or can trick the government agents. But typically, these taxpayers only dig themselves a hole that is deeper than the one that they were previously in. Sometimes, as an experienced tax attorney will tell you, it is in your best interest to say nothing during a tax investigation.

In addition to having an advocate in court, a seasoned tax attorney can protect your Fourth Amendment right against unreasonable search and seizure and your Fifth Amendment protection against self incrimination. IRS agents and other federal investigators bank on the fact that you aren’t knowledgable about the law or of your constitutional protections. Having a tax attorney by your side if the best way to ensure that you aren’t taken advantage of.

Contact an Experienced Tax Attorney Today

The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience in representing taxpayers in a myriad of different situations. From tax audits, to criminal investigations, to full blown civil or criminal litigation, our team can ensure that you have the best shot at walking away from a run-in with the IRS or Department of Justice without any negative consequences. The federal government will send their very best. Ensure that you are ready with a team of your own tax and accounting professionals. Contact the Tax Law Offices of David W. Klasing today.