Cash business operators are often prone to under report income or overstate deductions when filing tax returns. The effect of engaging in such conduct can be criminal charges, including tax evasion, money laundering and conspiracy to obstruct justice. The proliferation of Information Exchange Agreements between, local, state and federal taxing authorities makes the possibility of criminal proseuction all the more likely.
In United States v. Klein a conspiracy to defraud the United States by impeding and obstructing the IRS in the assessment and collection of income taxes was found. Klein is a 1957 case which is still good law. It was essentialy based upon poor to no records being maintained by the taxpayers, and the filing of knowingly false tax returns. The pattern of obstruction is still being repeated and prosecuted today.
Information Exchange Agreements, such as that between the Franchise Tax Board, (“FTB”) and the IRS provide for automatic exchanges of Protests assessments, and enforcement actions. Criminal assistance is also routine. Typical of conduct that may lead to obstruction charges is the deliberate under reporting of cash where cash is an important revenue component. Aided by bank cooperation under the Bank Secrecy Act, the IRS has much more insight into cash going through bank accounts.
When a business accepts credit cards, the merchant processors will file a Form 1099-K to report gross credit card sales to the IRS. With these sources of information the IRS has significant weapons to detect understatements of income. Add to that the results of state and local audits acquired through information exchange agreements, and at the groundwork for a tax evasion and consipracy charge exist. The other leg is the overstatement of expenses.
Deliberate overstatment of expenses, such as by including items as deductible which are clearly not is another aspect of tax evasion. Example: for operators of state licensed marijuana businesses, the IRC limts deductions under Sec. 280E to the Costs of Goods Sold, and precludes deducting other business expenses. Acts by taxpayers to disguise non-deductible expenses as deductibe under Sec. 280E items are just one other form of improper actions that can result in tax evasion charges. The use of falses vendors and shell corporations to hide money are others.
There are steps a taxpayer can take to come forward prior to being audited and once under audit to reduce penalty and criminal exposure. Such steps include having the books and records of the business reviewed for accuracy and completeness by competent counsel and then making a voluntary disclosure, prior to examination. The use of a lawyer at this phase is important in order to obatin the benfits of the Attorney-Client Privilege.
Once in examination coming forward to the auditor with accurate books and records and where appropriate filing amended returns with other taxing agencies. Some agencies may allow a “voluntary disclosure” so long as the taxpayer come forward prir to information being received about the pending exam. Some may not allow a voluntary disclosure as the act is not truly voluntary.
We at MillarLaw have a skilled team to guide taxpayers thorugh the complexities of when and how to come forward. We look forward to helping.