by Brian Mahany
Tax evasion is a felony. Prosecutors must prove that the person accused possessed a willful intent to evade taxes and committed some affirmative or overt act of evasion. Mere failure to pay taxes or file returns are misdemeanors punishable by no more than a year in prison. The difference is the required intent and overt conduct. That may soon be changing.
To understand the change proposed by the IRS, a bit more history is necessary.
The United States Supreme Court ruled back in 1943 (Spies v. United States) than an overt act is necessary to sustain the higher burden for convicting someone of tax evasion. Merely being lazy or negligent in filing returns isn’t enough (although that can get you convicted of the lesser misdemeanor charges).
The affirmative act of evasion can either be related to the payment of taxes or the filing of returns. Examples of affirmative acts include hiding assets in nominee accounts, having two sets of books, lying on tax forms and dealing in cash in order to avoid leaving a paper trail.
Persons convicted of tax evasion or intentionally filing false returns are felons. They are subject to much longer prison sentences and can often be arrested and extradited from foreign countries. While not every country allows extradition for tax crimes, many allow extradition for felonies.
Earlier this year, the Treasury Department published the Administration’s Fiscal 2013 Revenue Proposals. Contained in that voluminous document is the Obama administration’s plan to turn certain failure to file misdemeanor charges into felonies.
As noted above, present law makes failing to file a misdemeanor. Absent specific criminal intent and affirmative acts, the mere failure to file returns is at most, a misdemeanor. That means that thousands of expats living offshore have little to worry about when it come to extradition. Unless they return to the U.S., there is little risk of prosecution.
Under the new proposal, if you fail to file for 3 out of 5 years and your aggregate tax debt is greater than $50,000, you could be charged with a felony… a felony punishable by 5 years in prison and a $250,000 fine. It could also result in your extradition back to the United States if you are living overseas.
Every time I write about extradition, we receive a couple calls or emails from folks with extradition questions about specific countries. The United States has treaties with most nations. Even countries where no treaty exists are usually pretty quick to return someone accused of serious crimes such as child molesting.
There are several countries, however, that will not return someone accused of a tax crime. Why? In many nations, failing to file or pay taxes is not a crime. The government is free to seize your property and deny of you certain privileges but they can’t put you in jail. Not so in the U.S. The United States knows which countries will send back tax “cheats” and which won’t.
Lest you think you are safe in certain countries, the IRS and Justice Department have become wise to the game and often will now add a charge of “Conspiracy to Defraud” or Money Laundering to the mix. In most nations, that will guarantee you a one-way ticket back to the United States. For example, we know of many expats living in Panama with significant tax problems back in the U.S. Although Panama has been reluctant to return those accused of tax crimes, they will extradite if the person is accused of a fraud related felony.
The take away from this post is simple; if you have unreported offshore accounts or haven’t filed tax returns, seek professional advice. The IRS is getting more and more aggressive and there are fewer places to hide. For those whose non-filing problems are related to unreported foreign financial accounts, there is currently an amnesty program (“OVDI” ) offered by the IRS that may offer some relief.
For a greatly reduced penalty, one can come into compliance, file missing returns and FBARs and avoid both audit and criminal prosecution. The rules are quite complex, however, so be sure to seek professional advice as soon as possible.
The tax lawyers at Mahany & Ertl have helped many folks with tax compliance problems and those already under criminal investigation. If you have unreported offshore accounts, unfiled returns or unfiled Reports of Foreign Banks and Financial Accounts (FBARs), give us a call. Most of our services can be handled for a reasonable flat fee and all inquiries are protected by the attorney – client privilege.
Time is no longer on your side. If you are tired of looking over your shoulder, give us a call.
For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464.
Mahany Law – America’s Tax Lawyer. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California. IRS related services available worldwide.