Every day new releases from President Biden and his administration indicate that more regulation is needed to “protect” people. One of the areas that is going to get more attention is the rapidly increasing amount of federal income/payroll tax evasion.
People evading their lawfully owed federal taxes are breaking the law and putting more of the tax burden on the rest of us who are not cheating the system. This evasion is coming almost entirely from people who are either running their own businesses, or from independent contractors. Biden’s supporters are overwhelmingly made up of W2 workers—people whose income/payroll taxes are withheld by their employer. This group of taxpayers has a very low evasion rate—unless they have another source of income that they don’t report.
Preventing evasion is one of the reasons the Biden administration has announced that it will seek to force many independent contractors, and even some business owners, to become employees of the clients for whom they are providing services. The goal is to reduce evasion by subjecting as many people as possible to federal tax withholding.
Last week, in the article entitled INCOME TAX CRISIS—THE IRS WILL SHOW ITS TEETH, we discussed the tools that the IRS can and does use to collect back taxes from delinquent taxpayers.
Criminal Prosecution of Evaders
Most tax evaders assume that if they are caught, they will simply have to pay the amount they owe plus a penalty, and their case is over. However, the IRS has another tool they can use against evaders—prosecuting them for criminal tax fraud and sending them to prison. We are likely to see a lot more of this in the next four years.
A blog posted by Bishop Toups, a Florida attorney, provides some interesting data on federal income tax fraud. Here are some of the points made in his blog:
- Tax fraud is defined as a willful act done with the intent to defraud the IRS.
- In 2018, fewer than 2,000 people were convicted of tax crimes —0.0022% of all taxpayers, even though the IRS estimates that 15.5% of filers are not complying with the federal income tax laws in some way or another.
- A government study found that most cases of underreporting income were by self-employed people in this order: restaurateurs, clothing store owners, car dealers, telemarketers, salespeople, doctors, lawyers, accountants and hairdressers.
- A mistake on your tax return might get you a 20% penalty tacked on to your tax bill. While not good, this sure beats the cost of tax fraud—a 75% civil penalty added to what you owe in tax.
- If you’re convicted of failing to file a tax return for three separate years, you can be sent to prison for one year and fined up to $25,000 for each year you didn’t file. So, the total could be three years in prison and $75,000 in fines. You will also have a permanent criminal record.
- After a criminal conviction, the IRS will add civil fraud and other penalties for underpayment of taxes.
- If you are prosecuted but not convicted, you will almost certainly be audited and assessed for unpaid taxes.
- The typical amount of taxes owed in criminal cases is over $70,000 and covers three or more years of cheating.
EXAMPLES OF PEOPLE PROSECUTED FOR INCOME TAX EVASION
Joseph Nunan, Jr.
Mr. Nunan was a lawyer and served as Commissioner of Internal Revenue from 1944-1947. Mr. Nunan was charged with evading $90,000 in income taxes. He was ultimately convicted, sentenced to five years in prison and paid a $15,000 fine. He was also disbarred.
While many celebrities have been prosecuted for income tax evasion—Pete Rose, Aldo Gucci and, of course, Al Capone, many of the ones convicted are not celebrities. A post at Accounting Today listed the following examples:
- Tax preparer Eversley Barrett, owner of the tax preparation business Eversley Tax. Mr. Barrett created tens of thousands of dollars of false and fraudulent deductions for business expenses and gifts to charity on returns he prepared for himself and his clients. He also failed to report $300,000 of income. He pleaded guilty, was sentenced to six months in prison and agreed to pay $573,000 in unpaid taxes and penalties to the IRS.
- Ryan Wilkinson was the sole owner and operator of a roofing company. He did not file federal income tax returns for three years. He also had his company pay the rent on his personal residence and make payments for one of his personal investments. He was sentenced to three months in prison, followed by six months of home confinement and ordered to pay $228,300.41 in restitution to the IRS.
- Between 2010 and 2018, Stuart Weinstock provided to Rabbi Yisroel Goldstein’s temple $872,815 in checks that described the funds as “contributions,” “donations” or “business expenses.” Goldstein then secretly returned 75 percent of the money, or approximately $654,611, to Weinstock. In July 2020, Goldstein pleaded guilty to fraud, admitting that he participated in a complex, years-long, multimillion-dollar tax-evasion scheme and other financial deceptions involving theft of public money and implicated Mr. Weinstock who is awaiting sentencing.
- Dennis Saccurato owned and operated several cleaning product businesses. From 2014 to 2016, he withheld payroll taxes from his employees’ wages, but failed to pay them to the IRS.
- He has been sentenced to a year and a day in prison for failing to pay more than $549,715 in payroll taxes.
A PROBLEM WITH THE INTERNAL REVENUE CODE THAT CANNOT BE FIXED
One of the problems with the Internal Revenue Code, in addition to its complexity and imprecision, is that taxpayers have to pay their own costs to dispute any adverse IRS decision. The IRS auditor is being paid his/her salary and the attorneys that assist them are being paid from the Treasury.
For example, people regularly receive a letter from the IRS demanding payment of unpaid federal income tax. Usually, the unpaid tax resulted from the IRS computer assembling all of the 1099’s and K1’s received from banks, brokerage accounts or work, and determining that the amounts reported on these forms were not included on a taxpayer’s tax return. Therefore, additional taxes are owed.
Often this is correct, and additional tax is indeed owed. However, other times there is a valid reason for not including those amounts—you were sent the wrong 1099 for interest and you included the corrected one in your calculations. Let’s say the amount of tax, interest and penalty is $800.
If you speak with your tax advisor and explain how you don’t owe this money, the tax advisor will likely tell you to just pay it. You could try to contact the IRS, but generally they are not responsive and you have to keep trying to contact them. Because it is common for the IRS computers not to know that the assessment is being disputed, your “unpaid tax bill” may be assigned to a private collection agency and increase from $800 to $1000. If it’s still not paid, the unpaid amount will be deducted, with interest and penalties, from your next refund.
The costs in time, aggravation and expense are often just not worth it, so many taxpayers end up just paying money that they do not owe.
To some IRS auditors, referring more cases to the criminal division will be seen as a way to make their collections from tax audits improve dramatically. After all, how does anyone know what your “intent” was when taking the deduction? If you are indicted, your intent is likely to become the main factor in determining your guilt or innocence.
Take the example of a self-employed person who is audited. Assume that the IRS auditor reviewed the deductions and asserted that they were overstated by $30,000. Consequently, the taxpayer now owes $10,000 in taxes plus an additional civil fraud penalty of $2,000. When the taxpayer objects believing the deductions were proper, the IRS auditor threatens to refer the case to the criminal division claiming that the taxpayer was willfully trying to evade taxes. The auditor then explains that even if the criminal division chooses not to prosecute, the 20% penalty may well be increased to a 75% penalty if there is cause to believe that criminal fraud took place.
What is the taxpayer going to do? Generally, successful business people are adept at evaluating the risks and rewards of different actions. In this case, the taxpayer is likely going to ask a tax advisor for advice and be told that if the case gets referred to the criminal division, the taxpayer will have to:
- Hire a criminal defense attorney who will demand at least a $10,000 retainer.
- Be prepared for the attorney’s fees to increase dramatically if the IRS opts for criminal prosecution.
- The criminal division may offer to drop the case if you agree to pay the 75% penalty. (This is probably after your attorney has consumed your $10,000 retainer.)
- It will cost a lot more to defend the case than to just pay what the IRS is demanding.
- Going to trial and losing would likely mean going to prison—even if there never was any intent to evade the taxes.
- The cost of being sent to prison, in both emotional and economic terms, is higher than practically anything else.
Is this unfair? You bet it is, and there’s only one way to make it fair—make it impossible for the IRS to extort us in this manner.
While not all IRS auditors are this unscrupulous, some are, and the type of abuse described above will likely become more common as IRS supervisors demand that their agents crack down on evaders and recover as much unpaid tax as possible.
Most taxpayers are doing their best to comply with an incomprehensible law. Still, if something doesn’t change, these abuses will continue to happen to both honest and dishonest taxpayers. Unfortunately, many people don’t really care about IRS abuses because they don’t believe it can happen to them. People think that if they don’t take the kind of deductions an auditor is likely to challenge, that they’re in the clear.
What these people don’t realize is that a system that can trample on someone else’s rights can just as easily trample on theirs.
As Thomas Paine said, He that would make his own liberty secure, must guard even his enemy from oppression; for if he violates this duty, he establishes a precedent that will reach to himself.
The only solution—ENACT THE FAIRTAX. By eliminating the income tax, the FAIRtax eliminates the IRS and the abuses that come with it. With the FAIRtax, you pay your federal taxes at the cash register when you make retail purchases of new goods and services. No tax returns. No audits.
If you have friends who don’t know about the FAIRtax, send them to FAIRtax.org. Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.
Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.
Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:
“If you want a picture of the future, imagine a boot stamping on a human face—forever.”
Is it hopeless? When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?” But I dream things that never were; and I say “Why not?”
Isn’t it time for us to ask, “Why not?”