Most people think they pay too much in taxes and will do their best to avoid them, but few take that a step further into illegal tax evasion.
Many simply complain to anyone who will listen. Phil Mickelson, the professional golfer, did just that a few weeks ago when he finished a tournament and griped that he paid 62 or 63 percent of his income in taxes. Something was going to have to change, he said. His fans were probably more sympathetic before they learned he made $47.8 million last year.
In reality Mickelson, a resident of high-tax California, probably either misstated his actual rate — the federal government gives credits for state and local taxes — or he has the world’s worst accountant and should look into some of the many legal tax-reduction strategies available.
For some other people, the line between legal and illegal tax strategies gets blurred. Or they disregard it.
- Costco delays credit-card switch
- Band's frontman: No Super Bowl halftime show for Metallica
- WSDOT chief ousted by Senate Republicans after 3 years on job
- Driver arrested after I-90 crash that killed 2
- Seahawks’ Coleman going 60, didn’t brake before crash, police say
Most Read Stories
Marie Estelle Curran, a widow in Palm Beach, Fla., has found herself crossing the line of legality. She inherited a Swiss bank account from her husband worth $43 million. She did not disclose this to the Internal Revenue Service for nine years — her husband had not informed the IRS either. That was bad; worse was that she had moved the money from one bank to another, even seeming to set up a shell company in Panama.
Those actions told the IRS she was aware of the account. She is set to be sentenced next month, and could face six years in prison, at age 79, having already paid half of the balance of the account and back taxes to the IRS.
“We all tailor our notion of fairness to our self-interest,” said Meir Statman, a professor of finance at Santa Clara University in California and the author of “What Investors Really Want,” which has a chapter on great tax cheats. “People will tell themselves that I evade taxes because the government wastes it or there are people who evade even more taxes than me. People get themselves into tricky tax situations because of their anger at what they perceive as unfairness.”
It is fairly difficult to evade taxes on legitimate investments because the IRS can cross-check the forms supplied by the company and the individual. Where people run afoul of the law is when they cut corners.
One of the most brazen tax dodges is not declaring income. This is difficult for anyone who receives a W-2 or 1099 form for money earned. The IRS receives those forms, too.
But for people in businesses that are cash-based, the temptation to cut corners and the belief that they will get away with it can be greater. “I’ve got one right here on my desk,” said Maurice M. Glazer, chief executive of Glazer Financial Network in Dallas. “It’s a restaurant, and they’re already under audit. They’ve diverted the cash and put it into the backyard. You can’t divert income.”
The penalties for pushing tax avoidance into evasion depend on the severity of the offense. “There’s a fine line between conduct that rises to a potential charge for tax evasion and activities that don’t rise to tax evasion,” James N. Mastracchio, the co-chair of BakerHostetler’s national tax controversy practice. “It comes down to burden of proof. There has to be willfulness.”
The penalties for criminal tax fraud are the most severe and can include jail time.
An easy solution might seem to be a simplification of the tax code. When that happened in 1986, the demand for tax shelters dried up. But lawyers interviewed for this article said tax rates were not the primary impetus for tax cheats.
“I don’t think it’s higher tax rates that spur people,” Mastracchio said. “I think it’s about conduct. Unfortunately, there are people who take stances that they know are incorrect.”