Tax cheats cost the government real money from the lost revenue and the costs associated with enforcement and collection of unpaid tax liabilities. On the Federal and State levels, enforcement of the tax laws is a priority task to ensure that everyone is paying their fair share. Recently, the South Carolina Department Of Revenue (“SCDOR”) charged 30 employees of the Boeing Company with tax evasion over several years going back to 2011. The employees voluntarily turned themselves in to SCDOR investigators but are still faced with the prospect of hefty penalties and a five-year jail sentence for each charge.
The SCDOR Investigation
According to the news release from the SCDOR, the Boeing employees filed W-4 forms claiming exemption from South Carolina’s state income taxes. Apparently, during tax years 2011 to 2014, the workers claimed state tax exemptions although they did not qualify under South Carolina’s individual income tax guidelines. During the years in question, these Boeing workers also failed to file their state tax returns.
It is important to note that the workers received notices from SCDOR encouraging them to comply with the tax laws prior to issuance of arrest warrants. These Boeing employees were given several opportunities to rectify their tax problems but failed to do so. The tax liabilities ranged from $4,000 to about $20,000 based on collective incomes exceeding $4 million. Boeing issued a statement saying that the company was aware of the employees’ tax issues and were proceeding with their own investigation. Aside from their tax troubles, these employees may face disciplinary action from their employer.
Understanding State Income Tax Regulations
The State of South Carolina collects income taxes from residents earning an income in the state. Residents who earn incomes outside South Carolina would pay state taxes to the second state. If that state does not collect income taxes, the taxpayer must pay state taxes to South Carolina as their residential state. Nonresidents who earn income from South Carolina employers must pay taxes to this state. The state does not use a separate withholding exemption certificate from the Federal Form W-4. Exemptions and deductions that are allowed on the federal form are accepted for the state tax returns. In general, employees who received a full refund of taxes withheld in the previous year and who anticipate no tax liabilities in the current year may claim exemption from state taxes.
Enforcement of state taxes varies depending on the prevailing tax code although the state Department of Revenue is charged with enforcement. The process and penalties may vary, so it is important to consult a tax professional when you are faced with any State as well as Federal tax liabilities.
What Constitutes Tax Fraud?
Tax fraud is the deliberate intent to avoid paying taxes through whatever means despite the taxpayer being fully aware that taxes are lawfully due.Tax fraud may trigger penalties under the definitions of Title 26 in the Internal Revenue Code.
Specifically, Title 26 U.S.C. Section 7201 states that tax evasion is a felony that carries a penalty of imprisonment for at most five years or a $250,000 fine for each charge for every individual or a combination of fine and imprisonment along with reimbursement of court costs.
Tax evasion is an example of tax fraud. Tax evasion refers to all deliberate acts where taxpayers misrepresent their taxable income on their tax returns. This would include actions such as inflating expenses for larger deductions, strategically under-reporting taxable income or failing to file tax returns in a mistaken attempt to avoid paying taxes.
The Truth about Dealing with the IRS and State Tax Agencies
There could be any number of reasons why individuals choose to forego filing their tax returns. In the case of the Boeing employees, it is difficult to say what, if anything, made them believe that they could get away with non-filing and non-payment of state taxes for an extended period. It is safe to say that their end-game was not prison, but it appears to be heading in that direction. Looking at the amount of tax liabilities that each individual owed the SCDOR, it would have been much more sensible to comply with state tax laws. The tax dues were miniscule compared to the criminal penalties should they be prosecuted for tax evasion.
The existing tax code is based on the premise that taxpayers are willing and able to honor their tax obligations as upstanding citizens. As such, the IRS and the State revenue offices have programs in place to encourage taxpayers to voluntarily come forward to resolve their non-compliant status instead of waiting for tax agency notices or letters. Voluntary disclosure by taxpayers may count in their favor when the revenue investigator decides if the case merits criminal prosecution. The IRS also allows payment plans and in some cases, reduction of tax liabilities for low-income taxpayers.
Redemption for Non-filers
Tax laws may be rigid, but the IRS and State Tax Agencies do not exist to go after taxpayers who make simple and unintentional mistakes on their tax returns. However, blatant fraud that includes non-compliance with tax filing regulations over several years and ignoring tax agency notices will trigger an investigation and prosecution if for fraud charges. The tax agencies do not need to prove how much you actually owe in taxes to charge you with tax fraud and possibly secure a felony conviction.
If for any reason you failed to file tax returns or you need to amend any of your returns from the last six years, it is best to consult a tax professional to make sure that you are making the right steps. When you work with a tax attorney or a tax expert, you may not have to deal directly with the IRS or State Tax Agency. Your tax representative takes charge of requesting tax transcripts from previous years if you don’t have them anymore. If you owe taxes and are unable to make full payment at the time your returns are filed, your tax representative can negotiate a viable payment plan.
Don’t wait for the IRS or State Tax Agency to contact you if you have not been filing your tax returns or need to amend information submitted in previous returns. For your peace of mind, consult a tax professional who can guide you through the process to ensure a positive outcome and avoid prosecution.