Tax Crimes

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Ever wonder what it would take to be convicted of a tax crime? It’s probably less than what you would think. Hopefully you continue reading this post to satisfy your curiosity and not because you have any real need to know. Obtaining tax relief early in the game will usually help you avoid criminal investigations.

So for inquiring minds, here are some of the more common tax violations:

1. Evasion of Assessment

2. Evasion of Payment

3. Failure to Collect or Pay over Tax

4. Failure to File

5. Fraud & False Statements

All of these offenses require wilfulness, or criminal intent. Take “Failure to File,” for example. You may be guilty under Internal Revenue Code section 7203 for failure to file a return if (1) you are required to file a return, and (2) you willfully fail to file the return when it is required to be filed. Simple as that. If convicted, the penalty can be as high as $25,000, or imprisonment for up to one year, or both.

The “Evasion of Assessment” and “Evasion of Payment” crimes may be applicable even if the tax assessment or payment was not ultimately evaded. For example, you may be found guilty under Internal Revenue Code section 7201 for attempting to evade or defeat a tax if (1) a tax is due and owing, and (2) you willfully attempt to evade or defeat a tax or the payment of a tax. If convicted, the penalty can be as high as $100,000, or imprisonment for up to five years, or both. See the IRS Tax Crimes Handbook for more information.

The silver lining here is that wilfulness is usually a subjective standard in the tax code, meaning that a defendant’s good faith belief that he is not violating the tax laws, no matter how objectively unreasonable that belief may be, is a defense in a tax prosecution.

Whats New with Circular 230?

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The IRS made revisions to Circular 230 recently. Circular 230 is the Treasury Department’s collection of regulations governing tax practitioners. Apparently it now includes information relating to the new return preparer oversight program. It also includes “other changes.” Might have been nice if the IRS had highlighted the changes. Do I need to hire an intern to go line by line comparing the old version with the new one?

IRS Art Appraisal Process

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Nobody at the IRS knows a fine piece of art when they see it. Okay, that’s harsh and I’m perpetuating a stereotype that every IRS employee is robotic, boring, and unimaginative. There are thousands of IRS representatives and certainly a huge variety of backgrounds, interests, and personalities.

But its true what I say about their collective knowledge of art. The IRS outsources its art appraisal to an unpaid panel of 25 experts known as the Art Advisory Panel. If you’re hoping for some tax relief in the form of a low appraisal, you better think twice. These guys know their stuff; most of them are experts from renowned museums and galleries in New York.

According to the IRS, the Panel assists the IRS by reviewing and evaluating property appraisals submitted by taxpayers in support of the fair market value claimed in works of art involved in Federal income, estate and gift tax cases in accordance with the Internal Revenue Code. The IRS turns to its panel during an audit involving a piece of art with a claimed value of $50,000 or more. Or maybe the threshold is $20,000. According to the 2010 Annual Summary Report (which I looked through in its entirety and unfortunately did not see one single picture), its $20,000. Of all IRS publications, one would think at least this one should have some artwork, but no. Just words.

Tax Avoidance is Nothing New

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I don’t know anyone who doesn’t do what they can to pay less taxes. Yeah, I know, this statement is a double-negative, but its true. Everybody is looking for tax relief in some form or another. Some go to great lengths to avoid paying taxes, and some cross the line into the territory of illegal tax evasion. Although tax avoidance is common at all socioeconomic levels, the government has always been eager to make examples of the rich and famous.

I came across a very interesting memo written by Treasury Secretary Henry Morgenthau in 1936 addressed to President Franklin Roosevelt. Morgenthau names several prominent Americans that were found using questionable tax avoidance techniques, including Jacob Schick (the shaver guy), Charles Merrill & Edwin Lynch, George Westinghouse, Alfred Sloan (President of General Motors), Alfred du Pont, and William Crocker. He also describes 9 of the most popular techniques used at the time.

Roosevelt subsequently launched a full-scale federal investigation into tax avoidance activities, even though we know now from a look at his own taxes that FDR himself was no stranger to such techniques. Interestingly, as part of Morgenthau’s conclusion, he states that tax avoidance is isolated to the wealthiest citizens. I’m not sure what to make of this. It is either a testament to his naiveté, or one of the weaknesses of his report. Or perhaps things have really changed in this country since 1936.

Outsourcing Payroll Duties: Employers Beware

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Many employers hire third-parties to handle payroll and keep track of related tax filing obligations. However, whether or not the payroll service provider is liable for failure to file and/or pay the employment taxes, depends on the nature of the relationship. Most payroll arrangements fall under one of three categories:

1. Standard Payroll Service Provider (PSP)

2. Form 8655 Reporting Agent (RA)

3. Form 2678 Agent

Neither the PSP nor the RA are liable for ensuring that tax returns are filed timely and deposits and payments are made timely. Even though they may be responsible to do so under their agreement with the employer, the employer retains sole responsibility from the IRS’ perspective. But the 2678 Agent is a different creature. It files and pays the taxes of the employer using its own EIN and it shares joint and several liability with its clients (the employers) should penalties be assessed for failure to file or pay. See the IRS’ Third Party Arrangement Chart for a more detailed breakdown of the differences among these three relationship options.

Embracing Boredom: New Book for Tax Geeks

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Are taxes tedious and boring? Most people probably think so. But there is no better form of tax reliefthan the kind that comes from knowing the law and avoiding tax troubles in the first place. Check out this amusing excerpt from a book review written by Tax Notes writer, Joseph Thorndike:

Every tax professional knows the look — that mixture of pity and dismay when you tell someone what you do for a living. Sometimes it comes with a flash of fear behind the eyes — fear of taxes, sure, and probably fear of the IRS. But also, more profoundly, fear that you might actually talk about your job. God help us.

I can almost hear the chorus of complaints that readers are going to raise. “It’s not that bad! Some people are really interested in taxes!” Right. If it makes you feel better, you go ahead and tell yourself that. And by the way, I’d love to see the slides from your family trip to Yellowstone last year.

If anyone doubts the inherent tedium of taxation, we now have independent confirmation. The late, great literary phenomenon David Foster Wallace singled out taxation as the most boring topic imaginable. In writing his posthumously published novel, The Pale King, Wallace made taxes — and their administration in particular — the epitome of soul-killing tedium. “The whole subject of tax policy and administration is dull. Massively, spectacularly dull,” he writes.

Germany Cracking Down on Tax Evasion

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Americans aren’t the only ones who keep Swiss bank accounts. Germans have a long history of evading taxes in this manner too, and the German government has finally established a way to mitigate the damage this has done over the years. The two countries are reportedly going to sign a deal on August 10th that would allow for taxation of German deposits in Swiss banks. Under the agreement, Swiss banks could have to pay the equivalent of $2.5 billion to the German government for damage already done due to tax evasion over the past 10 years. These German accounts will thereafter be considered legitimate. Also, some think that this accord will make a positive impact on the relationship between these two countries.

Like the IRS, German tax officials have cracked down on tax evasion in recent years, and it appears to be paying off. See full story here.

Is There Tax Reform on the Horizon?

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Today the House passed the debt limit deal and tomorrow it is expected to be approved by the Senate. A 12-member panel will then be called and charged with the task of locating $1.5 trillion in budget savings by late November. Inevitably some of the panel members will want to overhaul the tax code to achieve this task. This would be a huge deal as the last comprehensive tax reform occurred back in 1986.

The tax deal itself does not look like it would raise taxes on corporations or the wealthy. However, the special committee could raise money by getting rid of their tax loopholes and subsidies. Rest assured, there will be no tax relief for the wealthy. If the committee doesn’t clean up the tax code, then President Obama has said he will be allowing the Bush tax cuts to expire in 2013. See the full story in Reuters.