The Feds Play Batman: IRS Criminal Investigations Releases Their 2012 Annual Business Report
In an era of increasing federal and state taxation, an increasing number of business taxpayers are tempted to minimize their taxes by intentionally underreporting their revenues and profits. These business owners often assume that if the IRS discovers their schemes, they will simply incur penalties and interest for unpaid taxes. However, as the “Annual Business Report for Fiscal 2012 Operations” recently released by the Criminal Investigation Division of the Internal Revenue Service indicates, potential punishment may be far more severe than monetary penalties. Before opting to commit fraud, all business owners should understand that dramatic tax reduction can oftentimes be realized through legal and valid tax planning strategies.
Although known to few, the activity of the Division should chill the spines of many business owners. The Criminal Investigation Division’s primary mission is to investigate crimes committed by people whose actions violate federal tax laws to enhance voluntary compliance with the tax laws. While the Criminal Investigation Division is separate and distinct from the IRS’ civil divisions that process and audit individual and business tax returns, the heads of the hydra still communicate with each other, as a large portion of the Criminal Investigation Division’s work results from referrals from the civil divisions.
The Report illustrates increased activity by the Criminal Investigation Division as both investigations and prosecutions increased sharply in 2012, which is unwelcome news for malfeasant taxpayers. The number of investigations initiated by the Criminal Investigation Division increased 8.6% from 2011 to 2012 and the number of convictions increased by nearly 12.1% from the same period. Most importantly, the Report indicates that 81.5% of convicted taxpayers were sentenced to prison.
The IRS’ primary focus is on Legal Source Tax Crimes, which relates to crimes committed by people in legally permissible occupations and industries (i.e., small and large businesses and individual taxpayers). This includes General Tax Fraud investigations, Abusive Tax Scheme investigations, Non-Filing investigations, and Employment Tax investigations.
- General Tax Fraud – This includes many different schemes, including deliberately under-reporting or omitting income (“skimming”); keeping two sets of books, or making false entries in books and records; claiming personal expenses as business expenses; claiming false deductions or credits against taxes; or hiding or transferring assets to avoid payment. For example, in 2012, an owner of a Buffalo, New York pizzeria was sentenced to 21 months in prison and ordered to pay $176,000 in restitution for maintaining two separate sets of books and underreporting his income by more than $500,000 from 2005 – 2007. Similarly, a New Mexico contractor was sentenced to 36 months in prison and ordered to pay $153,416 in restitution for filing false tax returns in which he failed to report $438,514 of income in 2005 – 2008.
- Abusive Tax Scheme Investigations – Investigation of promoters and their clients who willfully participate in domestic and/or offshore tax schemes for the purpose of violating the tax laws. Participants in these abusive schemes usually create structures such as trusts, foreign corporations and partnerships for the purpose of making it appear that a trustee, nominee, non-resident alien or other foreign entity is the owner of the assets and income, when in fact the true ownership and control remains with a United States taxpayer.
- Non-Filer Investigations – The Criminal Investigation Division investigates taxpayers who simply fail to file and remit taxes. For example, in 2012, an owner of an asphalt paving business was sentenced to 21 months in prison and ordered to pay restitution of $259,379 for failing to file tax returns from 2004 – 2008 during which he earned more than $950,000. Also, in 2012, a Mississippi man was sentenced to 108 months in prison and ordered to pay restitution of $1,063,634 for failing to file income tax returns from 1998 – 2001 and 2004 – 2007 and evading federal income taxes of approximately $245,000.
- Employment Tax – Employment taxes include federal income tax withholding, social security taxes, and federal unemployment taxes. Some business owners withhold taxes from their employees’ paychecks, but intentionally fail to remit those taxes to the IRS. Some of the more prevalent methods of evasion include “pyramiding,” employee leasing, paying employees in cash, filing false payroll tax returns or failing to file payroll tax returns. For example, in 2011, a Virginia business owner was sentenced to 60 months in prison for withholding payroll taxes from her employees’ paychecks and willfully failing to remit those taxes to the IRS.
Ultimately, the Report highlights the risks that a business owner incurs when violating federal tax laws. In most cases, inadvertent or minor violations are handled by the civil divisions of the IRS and tax assessments issued. However, when violations are ongoing and willful, the punishment may involve shackles rather than a hit to the checkbook.
While many small businesses and their owners face onerous tax burdens, there are many legal avenues available to reduce federal income, state income, and payroll taxes. The Internal Revenue Code is extraordinarily complex, but the complexity offers a large number of strategies that are often utilized by business and individual taxpayers to legally reduce their taxes. An experienced tax advisory firm with experience in tax planning, as opposed to tax preparation, is often able to guide a business owner to these strategiess and allow taxes to be minimized without the risks of prison.
