The title of this post, “Send in the Clowns,” is admittedly a bit harsh. We have previously represented several tax protesters in both audit defense and criminal investigations. None of them are clowns, however the promoters feeding them bad advice often were.
The government’s budget is over $4 trillion dollars these days. In light of the ongoing stimulus programs related to COVID-19, the amount of federal spending in 2020 is anyone’s guess. Unfortunately, the government never collects as much as it spends. Some of that gap is due to the huge bubble of baby boomers who are now collecting Social Security and Medicare.
But much of the problem is tax cheaters. Millions of Americans simply don’t pay what they owe. Whether or not they are simple tax evaders or members of the “tax freedom movement,” billions of dollars goes uncollected each year.
Tax evaders simply don’t want to pay and think they won’t get caught. (Many don’t.) Tax evaders rely on legal arguments to demonstrate they don’t owe Uncle Same. Unfortunately, under our judicial system the courts are the final arbiters of the law and the courts have soundly rejected all the theories advanced by these protesters. (The IRS now labels these folks as “tax defiers”.)
When this post was first written in 2015, Judge Richard Posner of the 7th Circuit Court of Appeals issued a ruling in yet another tax freedom case. (Although a federal appeals court judge, Posner was sitting as a trial court judge.)
Hakeem El Bey is a pro se litigant charged with defrauding the IRS. Although he is entitled to counsel, El Bay chose to represent himself. Posner, however, ruled that El Bey would lose that right if he continues to argue “utterly irrelevant, patently inaccurate, and sometimes unintelligible contentions.”
El Bey wants to argue that he is a sovereign citizen, that the federal courts have no jurisdiction over him because he is a member of the Cherokee nation, that the IRS has been dismantled and the U.S. government is insolvent. (We actually agree with El Bey on the latter point.) According to Judge Posner, El Bey also argues that an 1765 treaty with the Queen of England exonerates Americans to pay all taxes except those on alcohol or cigarettes.
Posner appears to make fun of El Bey in his opinion, pointing out that in 1765 the sovereign of England was a king and not a queen. The case is no laughing matter, however, as El Bey is charged with 8 felonies. Unfortunately, we see many audit defense cases – and a few criminal cases too – where clients have relied on similar arguments. In most instances, they do not end well for the taxpayer.
The tax freedom movement claims several victories. We personally know Joe Bannister, a former IRS criminal division special agent, who was charged with a felony count of defrauding the IRS. Bannister was acquitted but those victories are very, very few in number.
Bannister was charged over a decade ago. Since then, the courts have made it harder to win tax protester cases. The advent of “willful blindness” jury instructions sealed the fate of many would be tax defiers.
In criminal cases, the court acts as the gatekeeper. Just as Judge Posner ruled that El Bey couldn’t raise several defenses at his trial, judges routinely decide what information can be presented. Juries are the ultimate arbiters of guilt or innocence but judges determine what evidence a jury gets to hear.
Tax protester (or tax defier to be politically correct) prosecutions are down in recent years as are ordinary tax evasion prosecutions. We don’t think there are fewer tax cheats out there, just fewer IRS Criminal Division special agents and prosecutors.
In 2019, the IRS achieved a 91% criminal conviction rate. Don Fort, the head of the IRS criminal division said in his annual report,
“They took their money offshore and hid around the world, but we found them. They went on the dark web thinking that their actions were anonymous, but they weren’t, and we again found them. They now deal in crypto-currency, again thinking this will make them anonymous, but our agents have once again proved that there is nowhere to hide.”
The top priorities for the IRS in 2020 include illegal tax shelters, unreported offshore accounts and the use of cryptocurrencies to evade taxes and launder money.
If the 2019 statistics are any indicator of the future, if you are caught and prosecuted, you have an over 90% chance of getting convicted and an 80% chance of going to jail. (The average prison sentence last year was about 3.5 years.)
It’s not just criminal prosecution that tax protesters and cheats need to fear.
The IRS has a vast array of civil penalties that can be imposed. Failure to pay or file penalties are already high. But if an auditor determines you engaged in a reportable or “listed transaction” are huge. An the penalties for an unreported foreign account cane be 50% of the account value per year!
You can appeal an audit finding or penalties but the process is arduous. Appeals from an adverse ruling or tax assessment are first heard within the IRS. If that doesn’t resolve the matter, appointed tax court judges hear the case. Ultimately, a taxpayer can make it to federal court but the process is long and expensive.
No one likes paying taxes. As a a former tax prosecutor, I learned that most people like tax cheats even less. Although we don’t like paying taxes, the mood of jurors is often, “If I have to pay my taxes you had beter being paying yours.”
While some tax freedom advocates are educated and make good points, many are simply clowns. Relying on either could be at your peril. Ditto if you are a tax evader and think you won’t get caught.
IRS Whistleblower Program and Tax Evasion
The IRS maintains a robust program for whistleblowers. People that report tax cheats can receive a reward of up to 30% of whatever the government collects from the wrongdoer. Despite getting much more sophisticated in finding tax cheats, many of the best tax prosecutions to date began with a tip from a whistleblower*.
Although the IRS whistleblower program has been on the books for many years, in 2018 the total dollar value of rewards skyrocketed from $34 in 2017 to $312 million in 2018. The time has never been better to become an IRS whistleblower.
To learn more about the IRS Whistleblower Program and had to claim a reward, visit our IRS whistleblower information page. Ready to see if you qualify for a reward? Contact IRS whistleblower attorney Brian Mahany online by email or by phone at 800.669.7782.
All inquiries protected by the attorney – client privilege and kept in complete confidence. IRS whistleblower representation available worldwide.
*The only way to claim a reward is by filing a claim through the IRS whistleblower program. Using the IRS tip line does not qualify you for a reward.