Tax Crime Doesn't Pay, and the IRS is Going to Make Sure of That

IRS is Ever Vigilant on Tax Crime
March 26, 2014
Lauryn Hill's Tax Evasion
March 26, 2014

Tax Crime Doesn't Pay, and the IRS is Going to Make Sure of That

Today was almost the day of reckoning for Lauryn Hill. The popular singer appeared in court for sentencing after failing to report nearly $2 million in income to the federal government, but U.S. Magistrate Judge Madeline Cox Arleo postponed sentencing, granting Hill two weeks to pay $504,000 in back taxes. If Hill fails to pay the back taxes before her next court date on May 6, she faces a potential sentence of 24-36 months of jail time. The lesson here? Even celebrities can’t escape the IRS Criminal Investigations Division — and neither can any other taxpayers, including you.

Lauryn Hill’s Tax Evasion Reminds Taxpayers: Special Considerations for S-Corporations

It wasn’t until 2013 that Grammy Award winner Lauryn Hill admitted failure to file federal tax returns for income received during 2005, 2006 and 2007. In June of 2013, the famous New Jersey resident was charged with failing to report about $818,000 earned in 2005, $222,000 earned in 2006, and $761,000 earned in 2007.

It’s interesting to note that at the time, Hill owned four S-corporations. S-corporations are also called “pass-through entities” or “flow-through entities,” because they do not pay corporate taxes on earnings.  Instead, they pass on the tax obligations on income they generate to their shareholders or owners. If you’re creating an S-corporation (or any other type of enterprise), it’s important to work with an experienced business entity formation attorney so that you can feel confident you’re in compliance with all applicable taxation laws. Otherwise, you may find yourself facing similar penalties as Hill.

Just as a reminder, Section 61 of the Internal Revenue Code tells us that all income, regardless of the source from which it derives, is generally taxable. Believe it or not, that even includes money one has acquired illegally.

The IRS Aggressively Prosecutes Tax Criminals

While Lauryn Hill gets extra media attention because she is already a celebrity, her story is one of many as recently released IRS data shows. On March 25, the IRS announced the release of its 2012 Internal Revenue Service Data Book, which gives us a glimpse into the organization’s activities from October 1, 2011 through September 30, 2012. The report covers topics ranging from taxpayer assistance, to taxes collected, to enforcement actions, to returns filed, to the IRS’ own budget and workforce.

To save you the trouble of digging through the report yourself, here are some notable highlights:

  • The IRS collected nearly $2.5 trillion in federal revenue and processed approximately 237 million returns. (Almost 145 million — more than half — were filed electronically.)
  • Over 120 million individual income tax return filers received a tax refund, collectively totaling nearly $322.7 billion.
  • Collections, net of refunds, added up to almost $2.2 trillion.
  • On average, the IRS spent 48 cents per $100 in tax revenue collected during the fiscal year, the lowest cost since 2008.
  • The IRS audited 1% of all individual income tax returns filed, compared to 1.6% of corporate income tax returns.
  • Of the 1.5 million individual tax returns selected for an IRS tax audit, nearly 54,000 resulted in additional refunds.
  • The IRS assessed nearly $26.9 billion in civil penalties.
  • The IRS Criminal Investigation unit completed 4,937 criminal investigations — and referred 3,701 of those for criminal prosecution. That means approximately 75% of all investigations resulted in formal prosecution.

In particular, acting Commissioner of Internal Revenue Steven T. Miller noted that the IRS has made significant progress on international enforcement — specifically against the practice of illegally concealing assets and income by using offshore accounts. In fact, the IRS even offers a special program called the Offshore Voluntary Disclosure Program to help taxpayers with hidden foreign bank accounts come back into compliance. Program participants can file an FBAR and may thereby avoid facing severe criminal penalties.

As Miller stated, “We have continued our two-pronged approach: offering a voluntary disclosure program for those who want to come in and get right with the government, while at the same time pursuing tax evaders and the promoters and banks assisting them.”

Understanding Tax Crimes: Tax Evasion vs. False Returns vs. Failure to File

If the Criminal Investigation unit recommends prosecution for tax crime, it will turn its evidence over to the Justice Department to decide the special charges. Individuals are typically charged with one or more of three crimes:

  1. Tax evasion.
  2. Filing a false return.
  3. Failure to file a tax return.

Tax evasion is defined as “intentional conduct to defeat the income tax laws.” Therefore, any sort of tax scheme to cheat the government can fall into this broad category. You should be aware that tax evasion is a felony, the most serious type of crime. You can be sentenced to five years per individual count of tax evasion.

Filing a false return is exactly what it sounds like: your tax return contained inaccurate information, such as misrepresenting the industry you work in. More people are charged with filing false returns than with committing tax evasion, primarily because of a minor yet important distinction: the government does not have to prove intent to actually evade the income tax laws — only an intent to file a false return. However, filing a false return is a less serious felony than tax evasion, and carries a maximum sentence of three years compared to five.

Not filing a return is the least serious tax crime, but can still lead to harsh penalties. Failure to file is defined as intentionally failing to file a return when you were legally obligated to do so. Not filing a tax return is a misdemeanor rather than a felony. The maximum prison sentence is one year in jail, and/or a fine of $25,000 per year not filed. The vast majority of non-filers are never prosecuted criminally, and only receive civil fines.

Just the same, if you think you could be investigated for any of the above, your best move is to contact an Irvine tax attorney who is well-versed in criminal tax representation. David W. Klasing brings the effective combination of criminal tax representation as a combo Attorney & CPA with decades of experience. To arrange for a private case evaluation, call our law offices at (800) 681-1295 today.