Tax Fraud Pays Off?

by | May 7, 2008

The big tax news this month was the Justice Department’s loss in the Wesley Snipes case. Snipes has been cleared of federal tax-fraud and conspiracy charges, but was convicted on three misdemeanor counts of failing to file a tax return. He now faces up-to three years in a prison for the misdemeanor convictions.

Snipes fell victim to some crooked tax advisors (“tax protestor” shelter promoters), who themselves received a criminal conviction. At their behest, Snipes took the position that the IRS had no jurisdiction over him as it was not a proper government entity and that he was himself a “nonresident alien” and therefore not subject to tax laws of the United States.

The IRS has stated that it will pursue civil remedies to collect unpaid taxes, interest and penalties on the $58 million of unreported income. How can this be a victory for Snipes and the tax protestor movement?

On the fraud charges Snipes could have faced up to 16 years in prison, but he won’t. He made ridiculous, unsupportable statements and assertions (like not being subject to U.S. taxation as a non-resident, while holding a U.S. passport) and walked. He successfully argued that he did not intend to defraud the government as he held a good faith belief in his position.

What a fantastic outcome for any would be tax cheat! You take a completely off-the-wall position and don’t pay taxes. If you are not caught, you win. If you are caught, you don’t lose. You pay the taxes that you would have paid in any case. You pay the interest on the assessed tax liability, but you had the use of the money in the meantime, so that is not a loss. Your only loss is the tax penalty. But when you discount the tax penalty by the probability of getting caught, it is a risk most should be willing to take.

The only risk that taxpayers should never be willing to take is jail time. Snipes has shown us that we just need to argue stupidity and gullibility and we won’t have to do jail time. The Justice Department has made tax cheating a no loss proposition.

While the immediately preceding sentence is made “tongue-in-cheek” and most taxpayers are too smart to take these types of risks, there are many more where Snipes has come from. It is unfortunate that they will now believe that they may get away with it after all. Truth is, some won’t and will pay a heavy price for tax fraud.

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