Safe From the IRS but Not Necessarily From the State

My comments relate to Stephen Huggard’s article titled “Voluntary Disclosure to the IRS: A Viable Option” (March 08, page 40). This article was very well written and right on point. Huggard makes an excellent final comment in the article stating that, “As long as the taxpayer is careful, he or she likely will wind up poorer but still free, which definitely beats poorer and in jail.“

What is required by a client to stay out of jail is a voluntary disclosure and payment of back taxes, interest and penalties to the Criminal Division of the IRS. The key to avoiding prison for most major tax crimes is access to large amounts of cash. Huggard is exactly correct that the IRS would gladly accept cash without having to conduct an investigation rather than devoting resources to putting a taxpayer in jail. The taxpayer avoids both prison and the stigma of a criminal conviction on his record. This is a win-win for both the taxpayer and the IRS.

The way to stay out of jail for a crime such as tax evasion is to make a voluntary disclosure to the IRS before getting caught. In other words, a taxpayer who does not make a voluntary disclosure and is caught may be convicted and sentenced for past crimes. A taxpayer who makes a voluntary disclosure of past crimes and pays the unpaid taxes and penalties will not be charged with a crime. What seems to be forgotten is that a crime was committed in the first place.

Now let’s take a look at a taxpayer, “Ken,” of North Carolina. Ken pleaded guilty on May 23, 2008, to one count of failure to pay the N.C. state individual income tax. Ken received a 45-day suspended sentence and was placed on 24 months unsupervised probation. In addition, Ken must pay $155 per month for 23 months in restitution.

Ken’s real crime was that he obviously did not have any cash. He could have been guilty of tax evasion amounting to millions of dollars and still would not have been convicted of anything. By voluntarily disclosing a liability to the IRS and paying the taxes and penalties, a taxpayer can remain free without a criminal record. Ken, on the other hand, may still end up in jail for his meager crime if he is unable to pay the state of North Carolina its $155 each month.

There is definitely a major disconnect between the IRS and the states. The IRS appears to be willing to forgive criminal activities while the states attempt to make an example out of minor offenses.

Mark N. Schlueter, CPA
Greensboro, N.C.

Author’s Reply: I am not familiar with the facts of “Ken’s” case, but I would be surprised if he was prosecuted criminally simply because he could not pay. Almost certainly he committed some act of deception toward the state. Tax prosecutions are generally based upon some willful misconduct by the defendant. At the same time, Mr. Schlueter makes a broader, valid point. Whenever you are dealing with the IRS criminal investigators, it is wise to keep the state folks in mind, especially if you live in a state with an active state criminal tax enforcement effort.

Stephen G. Huggard, Esq.
Boston