Like other sources of taxable U.S. income, business income must be reported to the IRS. For example, partnership income is reported on Form 1065 (U.S. Return of Partnership Income), income from corporations is reported on Form 1120 (U.S. Corporation Income Tax Return), and income from sole proprietorships is reported using Form 1040, Schedule C (Profit or Loss from Business). Notably, limited liability companies may elect to file as corporations or partnerships, depending on their chosen tax strategy. But no matter the type of entity, when business owners of any kind hide income from the IRS – whether by failing to file the appropriate returns, or by underreporting the company’s earnings – the resulting civil and criminal tax penalties can be severe. By way of example, look to Wisconsin tax defendant Steven Rader, 37, who was recently sentenced to five months in federal prison and ordered to pay nearly $200,000 in fines after pleading guilty to felony tax evasion. According to the U.S. Department of Justice (DOJ), the charges against Rader involved a years-long tax fraud scheme by which the defendant knowingly concealed hundreds of thousands of dollars in business income from the IRS.
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A DOJ press release announced the June 2019 sentencing of defendant Steven Rader, a Muskego, Wisconsin business owner whose company Willie Fun Entertainment provided DJ and entertainment services for various events. In addition to operating Willie Fun Entertainment, Rader was also employed part-time by Wisconsin’s Hamilton School District, which he served as technical director. However, only income from the latter – approximately $9,000 per year – was reported on the defendant’s tax returns. Meanwhile, Rader concealed roughly half a million dollars from the IRS, willfully omitting all income from Willie Fun Entertainment on “federal tax returns for the years 2012 to 2014.” By willfully understating his business income by approximately $500,000 over a three-year period, Rader evaded the payment of approximately $90,000 in U.S. income taxes.
By 2013, Rader’s returns had attracted the IRS’ notice, leading to a tax audit. (For detailed information about the likelihood of an audit, common triggers for IRS audits, or how the IRS decides which returns to audit, browse our tax audit FAQs, or talk to our IRS audit lawyers for help.) In response, Rader filed amended returns – which were also inaccurate. Rather than amending the returns to reflect 100% of the previously unreported income, Rader reported only $223,466: the amount he received through the online transaction service Paypal. By way of explanation, Rader claimed he did not accept any other forms of payment from customers, despite actually accepting both checks and cash.
“The honest women and men who pay their taxes dutifully,” said Matthew Krueger, U.S. Attorney for the Eastern District of Wisconsin, “deserve to know that tax cheats face time in federal prison. We are committed,” he continued, “to defending the integrity of our government by prosecuting tax crimes aggressively.”
U.S. District Judge Joseph P. Stadtmueller agreed, handing down a five-month sentence in federal prison. In addition, Judge Stadtmueller ordered that Rader “pay more than $195,000 in restitution” for the tax losses caused by his crime.
There are several lessons for taxpayers to take away from this case. First, it is essential to report income accurately, as noncompliance is all but guaranteed to result in an eventual audit. Second, if you are contacted about an audit, you should consult an experienced tax attorney for step-by-step guidance, since filing false amended returns will merely exacerbate your present situation. Third, there can be harsh civil and criminal penalties for tax evasion – not only in terms of the fines and expenses, but more starkly, loss of your personal liberty and potentially the end of your career if there is a moral character requirement to engage in it.
Effective criminal tax defense representation can be the difference between freedom and incarceration. By working strategically, a tax fraud defense lawyer can also mitigate the financial penalties you face, protecting your rights and advocating on your behalf. Of course, the best way to avoid a criminal tax investigation is to work with a trusted tax compliance attorney, like David W. Klasing, who can guide you and your business safely through the Internal Revenue Code.
Whether you are facing tax fraud charges, or you simply have questions about tax planning and compliance for your small business, the Tax Law Office of David W. Klasing is here to provide dedicated, award-winning service and support. To set up a reduced-rate consultation with an income tax evasion lawyer or business tax attorney today, contact us online, or call the Tax Law Office of David W. Klasing at (800) 681-1295.
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