Articles Posted in Criminal Tax Cases

Most taxpayers think because they are married, that they need to file a joint income tax return. That is not correct since they can file separate tax returns based upon their own income and expenses. In some cases when a couple divorces, and they filed jointly,  it is found out not all of the income was reported. For instance, take this example:

I recently reviewed tax returns jointly filed by Ms. and Mr. Soris for the tax years 2015 to 2017. During that time frame, Ms. Soris operated a business as a fitness coach. The majority of the income she earned was from cash transactions and PayPal. From a review of the records provided by PayPal, not all of Ms. Soris’s income was included in their joint income tax returns. My calculation showed $150,000 was missing from gross receipts, just looking at the PayPal data alone. The good news, both the Internal Revenue Service and the New York State tax department have formal written programs and policies where taxpayers can voluntarily report and disclose under-reported income with their tax returns. It is important to keep in mind that the main goal of the tax authorities is to collect tax, and not to prosecute people. Therefore, if the taxpayer cooperates and signals a clear desire to repay the taxes owed, they will usually avoid a criminal charge and prosecution.

a5-300x300The policy rules of the Internal Revenue Service, that is contained in their Internal Revenue Manual section 38.3.1 (08-11-2014), a taxpayer can correct problems with their tax returns that may be viewed as potentially criminal in nature by following specific voluntary disclosure steps. The steps are 1) communicating to the IRS the issue (normally through an amended tax return being filed providing the details of the issue, along with a letter demonstrating a willingness to cooperate with the IRS in determining their correct tax liability), and 2) making good faith arrangements to pay the IRS back.

When a client has a tax problem, that may also be a criminal tax problem since they crossed the line of mere negligence to civil fraud, extra steps are needed to protect the clients interests. As in all cases, there is not a bright line between civil and criminal tax cases, and many tax cases with the potential for criminal prosecution are resolved through civil proceedings.

a9-300x300A criminal tax case involved when the taxpayer willfully violated the tax laws. The most common examples of this is tax evasion or failing to file a tax return. Typically, the government must institute criminal charges within six years of the due date of the tax return. Criminal tax cases are typically investigated within the IRS by special agents. Many cases start of civil audits, and as information is uncovered that leans toward potentially criminal conduct, the audit can shift to the criminal investigation group within the IRS. Therefore, it is important to recognize the warning signs  that the person handling the civil audit, whether it is a compliance officer of revenue agent, is going to suspend the audit and refer the case to the criminal investigation unit. Since the IRS will not tell the taxpayer about the potential criminal investigation, the clearest indicator that the case was referred is it is difficult to reach the civil auditor after many attempts.   However, before that happens there are warning signs to look for that the case is headed in the direction of a criminal issue when during the course of the audit the auditor asks for many details related to omitted income, the audit is taking longer than normal, the auditor is issuing summons to third parties, or is making copies of all the relevant documents. Most seasoned tax professionals can spot this issue fairly easy.

The next issue therefore, is how to handle the case at that moment you suspect a criminal issue. A IRS special agent will normally want to visit the taxpayer at their home, as a surprise tactic to gather information. The  taxpayer should not let the agent into the home, and should tell the agent they are retaining council to assist with the matter.  Since this initial interview may be the most important event during the case, it has to handled with care. Many honest taxpayers believe that they can talk their way out of trouble, but then they start making admissions and factual misstatements that criminally hamper their case. In most cases, a tax attorney should be the person explaining to the IRS why certain items are missing from the tax returns, and the taxpayer should remain quiet.

Usually, the most panicked and upset clients call me and when they have not filed their tax returns in many many years, and are extremely worried that by this inaction they will be arrested, or worse thrown in prison. Occasionally, clients are audited for non-tax problems ( for example workman’s payment insurance, highway permits) by the IRS or State of New York, and the auditor makes the discovery that the taxpayer has not filed their income tax returns in a long time. This “great” discovery causes a lot of angst to the taxpayer, but usually the IRS and the States are not quick to press charges if the tax returns are filed quickly (see list below of action steps needed). Typically, you only have a criminal tax problem is you intentionally do not pay the right amount of taxes, so usually they issue is manageable. Therefore, non filing typically does not cause the same level of problems are actively avoiding paying taxes, and your almost never going to jail.  Please keep in mind, in New York State it is actually a felony to not file your income tax returns for at least three years in a row where you owe taxes for each of those years. It is not often that NYS Tax uses this law to charge a taxpayer with a crime, but I have seen it applied in hundreds of cases, so it is not overly rare that they do.

a7-300x300The IRS and NYS tax auditors normally take the approach of creating their own estimated version of the income tax return you failed to file (called a substitute tax return), and charging the taxes owed based upon their computation based on limited information. Please keep in mind they have no incentive to lower your tax bill, so their work is suspect. The crucial point is that the substitute tax returns tends to overstate the tax debt amount, since they give you no deductions and use  the highest possible tax rate. As they say, you never get something good for nothing.

The very long standing IRS’s voluntary disclosure policy applies to a taxpayer who: 1) Informs the IRS or NYS that they failed to file a tax return, 2) You make the disclosure prior to being notified by the tax authorities, or before you are under criminal investigation for failing to pay the right amount of taxes, 3) File the correct income tax come returns, and cooperate with the tax authorities (NYS and IRS) in ascertaining their correct income tax liability, and 4) Make full payment of the amount of the sales or income taxes due, or if are unable to make payment in full, to create a monthly tax payment plan for the tax balance owed.

a1-300x300A recent Internal Revenue Service Office of Chief Counsel memorandum (CCA 201725026) provides guidance on whether the IRS can charge interest on court ordered restitution payments related to Title 18 criminal tax cases. As background, typically when a court orders restitution in a criminal tax case, it is often for an amount equal to the taxes not paid by the defendant due to their conduct. Before Congressional FETI ACT of 2010, the restitution was not viewed as a “tax” under the income tax rules. This act changed that.

The three main issues addressed in this memorandum are:

  1. Whether the court-ordered restitution incurs interest under Title 26 (Internal Revenue Code)

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While there’s no way for an individual to completely avoid paying taxes, there are ways to cut and reduce the amount of taxes an individual owes. By being proactive and engaging in tax planning, an individual can often reduce his or her tax liabilities substantially. It’s important to note, however, that there are creative strategies that can be employed to reduce the amount of taxes one pays and then there are those that are questionable or outright illegal.

Simply failing to file and/or pay one’s taxes is never a good idea. Not only is an individual likely to accrue costly fees and penalties, but he or she may also face criminal charges related to tax evasion. Additionally, it’s never a good idea to file or submit tax-related documents that contain false or doctored figures. Again, an individual who under- reports the amount of income or overestimates deductions will incur costly fines and penalties and may face charges of tax fraud.

In cases where an individual learns that he or she is being investigated or audited by the Internal Revenue Service, it’s wise to contact an attorney. It’s especially important to retain a strong legal advocate and representative if an individual is concerned that an IRS audit or investigation may result in the discovery of questionable or illegal tax-avoidance activities.

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A Staten Island lawmaker could see his political career come to a screeching halt after pleading guilty to tax fraud last month. U.S. Rep. Michael Grimm (R-NY) pleaded guilty to one count of aiding in the filing of a false tax return, in 2009.

Grimm, an ex-Marine and FBI agent, now faces a maximum of three years in prison, which would force him to resign from Congress. His sentencing date has been scheduled for June 8, where a judge will decide his fate.

However, a much worse outcome was avoided thanks to Grimm’s attorneys. Grimm was set to go to trial on Feb. 2 on a 20-count indictment for evading taxes by underreporting income, paying workers off the books and hiring undocumented workers.

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As we discussed in an article on our website, most people don’t think of contacting a tax lawyer until they are facing some kind of problem such as being accused of not paying taxes or being audited. However, it’s best to work with a tax lawyer before that happens in order to avoid these problems in the first place.

For example, one time New York residents may run into tax issues is after receiving an inheritance. Typically, receiving an inheritance is not a taxable event, but there can be tax controversies that arise and greatly complicate the inheritance for the beneficiary or the executor of the estate.

In order to avoid this, it’s best to consult a tax attorney who can work with the estate planning lawyer to make sure that all potential tax issues are resolved.

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In recent years, the U.S. government has been cracking down on individuals who hide money in overseas bank accounts in effort to evade taxes. The Justice Department has mainly focused its efforts on foreign bank accounts in Switzerland but it beginning to expand to other countries such as Israel as well, the Wall Street Journal recently reported.

The Justice Department has not only been targeting individuals that have attempted to evade paying taxes themselves, but also top bank officials who allow it to happen. However, the government has learned that it’s not always easy to do that.

This week, a former top official at UBS AG was found not guilty of helping American banking clients defraud the Internal Revenue Service out of billions of dollars in taxes. It was fairly evident that the conspiracy was taking place at the bank, but the prosecution had little evidence to implicate the former UBS official beyond a reasonable doubt.

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Taxes in New York have made national news in recent years because of some eye-catching laws. New York State taxes cigarettes, for example, at the highest rate in the country among states; New York City adds on additional tax on top of that. Thus, it can be tempting for some people to try to get around these tax issues by finding cheaper cigarettes from other jurisdictions.

However, this is not merely difficult, it is also illegal. Cigarette packs sold in New York must have a tax stamp from our state. Having unstamped cigarettes — or those that bear the stamp of another state — is a violation taken very seriously by the state taxation department.

Recently, a man in Brooklyn found this out for himself when he was arrested for possessing and selling untaxed cigarettes. In addition to allegedly having cigarettes that had no state stamps, officials said the man was selling cigarettes bearing the stamps of Virginia and Georgia — states with cigarette tax rates of 0.30 and 0.37 percent, respectively. By contrast, New York’s state tax rate is 4.35 percent.

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It’s not uncommon for people with high incomes to try to find tax strategies that will reduce the amount of taxes they have to pay. After all, nobody wants to pay more in taxes than they have to. And people who earn top salaries often have more motivation to find creative ways to minimize their tax burdens.

However, choosing the wrong way to go about this can lead to some serious tax problems — especially when there are large amounts of money at stake. Now, several NFL players and other wealthy people are saying that their tax attorney came up with unlawful schemes to help his clients claim millions of dollars in tax credits that were bogus.

As a result, the tax attorney has been prohibited from promoting his tax reduction techniques or preparing tax returns. Some of his former clients have filed lawsuits against him, saying that he committed malpractice and fraud in order to help them reduce their tax liabilities.

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