Haven’t seen AMC’s TV series, Breaking Bad? You don’t know what you are missing. A high school teacher, Walter White, turns into a major drug dealer, murderer, and tax advisor. While morality may not be his strongest suit, tax advice is clearly his weakest. Don’t worry; there aren’t any series finale spoilers in this post.
Thinking about running your own drug syndicate? Don’t follow Mr. & Mrs. White’s lead.
After the birth of her child, Skyler, Mr. White’s wife, goes back to work as a corporate bookkeeper. As she starts reviewing the numbers, she notices accounting irregularities (“Badges of Fraud”). She starts to worry that the IRS will come after her and Walt because she signed off on many of the corporate returns.
Skyler decides to take her husband’s illegally earned money, and she uses it to pay off the taxes. Luckily, this works, and all is well for time being in the White world. Go Skyler, go!
Nonetheless, as the saying goes, “when in a hole, stop digging.” Once the IRS catches you in your hole, you won’t be able to work your way out of it so easily. Maybe, Mr. White should have listened to the “stop digging” advice as well when digging his own holes in the show…
The IRS could charge the Whites with tax evasion, conspiracy, obstruction of justice, and money laundering, among other things. So here are some of the Whites’ other tax no-nos that you should avoid.
Do not evade taxes.
The IRS considers tax evasion as “some affirmative act to evade or defeat a tax, or payment of tax.” Common evasion schemes include the understating or omitting of income; claiming of fictitious or improper deductions, credits, or exemptions; allocating of income falsely; and concealing of assets.
Under this Internal Revenue Manual’s statute, the IRS would see the Whites’ illegitimate car wash and hidden barrels of cash as plans used to evade the agency.
If Mr. White happens to live longer, he could serve a prison sentence up to five years plus face fines since tax evasion is a felony.
Tax evasion can affect sentencing.
In United States v. Hoskins, a criminal case involving a Salt Lake City Escort service, the couple leading the service failed to report over $1 million in income. This failure to report income led to the IRS filing criminal charges against them.
The amount of taxes they did not pay had a direct effect on the length of their prison sentence.
Say that the authorities catch Mr. White. He might have a few other criminal charges against him, but tax problems may arise from the barrels of cash that he has hidden in the New Mexican desert. The hidden barrels, worth maybe close to $80 million, alone will probably lead to a long prison term for Mr. White.
Illegal income is still income.
Remember Al Capone? He was the ultimate American gangster who led a Prohibition-era crime syndicate in Chicago. From the early 1920s to 1931, he would smuggle and bootleg liquor, and run prostitution rings.
Despite murder and racketeering charges against Capone, the court only convicted him on an income tax charge for not reporting his illegal income.
Even if you happen to make your money through unlawful activities (creating and distributing crystal meth in Mr. White’s case), the IRS still considers that income taxable. It’s a shame that Mr. White didn’t learn from Capone’s crucial tax mistake.
Avoid hiding illegal income through money laundering.
The Whites didn’t want to report any of their illegal income. Instead, they perfected a money laundering scheme by using their car wash and faking customer receipts to legitimatize their extraordinarily large income. Internal Revenue Manuel 9.5.5 states that criminal tax charges are often combined with money laundering, racketeering, mail fraud, and conspiracy.
Remember that you won’t receive deductions for reporting illegal income even if the income is legitimate in some states.
Though some state’s medical marijuana dispensaries make profits legally, Section 280E of the Tax Code “denies even plain vanilla tax deductions for those dealing in controlled substances.” Due to this Tax Code provision, claiming expenses can pose a problem for medical marijuana dispensaries.
To justify many medical marijuana dispensaries’ incomes, they deduct expenses for the business of “care-giving” rather than deducting for dispensing marijuana. However, Mr. White’s illegal payments, i.e. hiring Saul Goodman’s hitmen, generally are not deductible.
Nonetheless, reporting your illegal income can lead to the IRS limiting your tax deductions because you may be admitting to a crime.
Don’t fail to file returns. If you do file them, make sure you accurately report the returns.
Coupled with other charges, the IRS could charge the Whites’ for failing to file or for filing false returns.
Any person filing false returns may be subject to forfeiture of property and/or jail time per 26 U.S.C. § 7206. The Whites’ car wash and the phony receipts would give the prosecutor with enough evidence of the Whites falsifying tax returns.
A failure to file charge, a misdemeanor, could lead to up to a year in prison with additional penalties. Penalties would be for “5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month […] during which such failure continues, not exceeding 25 percent in the aggregate.” The IRS would have to prove that the Whites’ failure to file was due to willful neglect. This would be pretty easy to prove since the Whites willfully neglected to pay taxes to provide their children with a large sum of money in the case Mr. White ever passed away from his cancer.
In the case of Wesley Snipes, he weaseled his way out of some serious tax-related charges, and instead, he only received three misdemeanor counts of failing to file tax returns in 2008.
Beware of FBAR Violations
The Bank Secrecy Act requires taxpayers with financial accounts outside of the United States, which total more than $10,000 in the aggregate to file an annual report, the Report of Foreign Bank and Financial Accounts (FBAR), with the IRS. With some outside help, Mr. White decided to sell his product overseas. If he made money abroad and stored it in offshore accounts, there may be FBAR violations as well.
“Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. If willful, the penalty is the greater of $100,000 or 50 percent of the amount in the account for each violation. Each year you didn’t file is a separate violation.”
“Criminal penalties are even more frightening, including a $250,000 fine and 5 years imprisonment. If the FBAR violation occurs while violating another law (say tax law, which it often will) the penalties are increased to $500,000 in fines and/or 10 years of imprisonment. Many violent felonies are punished less harshly.”
After reviewing Mr. White’s tax advice from the past 5 seasons, I think H&R Block or the IRS could hire him as a tax fraud expert working from his jail cell. As mentioned before, there is some hope for Mr. White. Al Capone had a few more problems than just taxes; err maybe, Mr. White can squeeze himself out of this additional dilemma like he has done many times prior. No, Mr. White, you cannot kill the entire IRS agency either, the Congressional Republicans try to abolish it all the time already.
JDKatz, P.C. is a full-service law firm focused on tax law, business and transactional law, estate planning and elder law. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys, or visit http://www.jdkatz.com.