Tax Cheats and How to Stay Out of Trouble

Money-Guy 04-01-2011

“The income tax law is a lot of bunk.  The government can’t collect legal taxes from illegal money.”
These are the famous words and unsound tax advice of notorious gangster, Al Capone.

As tax season is coming to a close, we focus today’s show on providing more sensible advice than Capone’s and how to avoid joining the ranks of he and other famous tax cheats.

We start out the show with a bit of a “name that tax cheat” game.  I play some clips featuring well-known individuals who tried (and failed) to beat the tax system.  Richard Hatch, the first winner of Survivor, failed to pay tax on his $1 million dollar prize,  Richard Pryor served 10 days in jail for failing to pay taxes, claiming he “forgot”,  Wesley Snipes famously argued that his income wasn’t taxable, and last, but certainly not least, Willie Nelson had assets auctioned off to cover his outstanding bill.

Earlier this year, the IRS issued a press release addressing common frivolous arguments made by those who demonstrate resistance to following federal tax laws.  You can read more about general tax arguments, arguments in collection due process cases, and penalties for pursuing frivolous tax arguments in the press release, The Truth About Frivolous Tax Arguments.

Another great resource comes from Forbes blogger Robert W. Wood.  In his article, To Avoid Fate of Wesley Snipes, Skip Tax Protester Arguments, Wood cautions readers against even attempting to use arguments against the IRS.  Whatever rewards tax protesters chase are simply nothing compared to the risk and penalties involved.  Common arguments to avoid include:

• Our Federal Income Tax System is Voluntary.
• Definitional Arguments Based on the Meaning of “Taxable Income” and “Gross Income.”
• Definitional Arguments About Terms in the Internal Revenue Code.
• Steer Clear of Constitutional Amendment Claims.
• Other “Fictional” Legal Theories.

So far we’ve focused on things you should obviously not do if you hope to avoid trouble with the IRS.  Now, I want to warn those of you who think you are doing all the right things about some hidden risks involved with hiring a tax preparer. While you may think you are safe from the IRS because you hired a professional, you have to make sure that your preparer is actually good at what they do.  ABC News put out an article, Five Signs You Might Have a Bad Tax Preparer, informing readers of surefire clues that their relationship with their preparer may become damaging.  The signs include:

• Your tax preparer does not have a Preparer Tax Identification Number.
• A tax preparer makes blanket claims or guarantees a specific refund amount without knowing about your financial situation.
• Your tax preparer has a questionable history.
• Your tax preparer asks you to sign a blank tax form.
• Your tax preparer does not ask you to review the completed return before filing it.

My advice when it comes to hiring a professional is to do your homework.  Make sure your preparer is asking a lot of questions in order to maximize your deductions.  While tax evasion is illegal, tax avoidance is highly encouraged.  You should seek a preparer who creates the most benefit for you while also adhering to the law.  Keep in mind that not all preparers are created equally and hiring a professional does not protect you from the IRS if a mistake is made.

The moral of the story is, don’t cheat the government.  As history has shown, those who play with fire usually get burned.  Do everything you can to be accurate and keep yourself out of trouble.

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