Can you be indicted for not filing a tax return? We're going to get to the answer right away: yes, it is a federal crime to willfully fail to file a tax return (See 26 USC 7203 below). Well, that was easy, wasn't it? Not so fast. With the IRS, nothing is ever that easy.
Here's the reality of the situation. In the practical world, there is little risk of prosecution for failing to file a tax return. That's not to say that criminal prosecution doesn't happen, but the likelihood of it actually happening are extremely low. One of the primary reasons for the lack of criminal prosecution is that those engaging in intentional attempts to evade taxes are much more likely to file a tax return that leaves off some income, not to fail to file altogether. When it comes to tax evasion (focusing primarily on those that file falsified returns), you better believe that the Department of Justice (DOJ) wants to bring down the hammer.
The other reason is that thanks to the ubiquitous third-party reporting — i.e., W-2s and 1099s — the IRS has very few problems filing a substitute for return (SFR) for you if you do not file your own tax return. This means that failing to file is not a good way to evade taxes as the IRS will likely send you a tax bill much larger than you would have owed if you filed a correct return.
The truth is that millions of people fail to file their tax returns every year (usually to their detriment). And yet, few are at any risk of criminal charges. That being said, every now and then someone is indicted for failing to file a tax return. When it does happen, because it is so rare, there's usually a reason for it. Sometimes you have to dig to understand what's not being said or might not be apparent in a press release.
That brings us to December 9, 2015. The US Department of Justice published a press release that included the following:
"Oregon Man Indicted for Failure to File Tax Returns
A federal grand jury sitting in Portland, Oregon, returned an indictment yesterday charging a Hillsboro, Oregon, resident with six counts of willfully failing to file an income tax return. According to the indictment, Winston Shrout received gross income for the years 2009 through 2014 in amounts that required him to file a federal income tax return. However, for each of those years, Shrout willfully failed to file any income tax returns. Shrout’s income included payments for services as a presenter at seminars; licensing fees associated with the sale of products in his name and the name of his business, Winston Shrout Solutions in Commerce; and annual pension payments.
If convicted, Shrout faces a statutory maximum sentence of six years in prison and a maximum fine of $150,000."
As I read this, I had to wonder, what is the real reason — out of millions of non-filers that the US DOJ could pick from — that they would decide to indict Winston Shrout for failing to file his tax returns?
Here's something that people need to understand – what you put on the internet is there for all to see. That means that what you disclose can and — in the event of a trial — will be used against you. Well, with Mr. Shrout, it only took a few minutes of searching to find why the DOJ would go after him specifically. Winston Shrout claims to be a so-called expert on law and theology; he presents convoluted theories as fact. While Winston appears to speak English, his concepts are so alien that it's almost impossible to grasp a single thing he says. Match that with some impressively long-winded monologues, and it starts to make sense why the DOJ would target him.
I
don't mean to bash Winston, but I want to make it apparently clear what the folks over at the DOJ can home in on. On November 17, 2015, Winston Shrout was interviewed by "the Galactic Connection," a series of videos for those wanting to have their understanding span the universe. I'm not saying that participation in this kind of spiritual experience will make you a target of the DOJ, but you better believe that it doesn't help:
Yes, the interview is 1 hour, 52 minutes, and 45 painful seconds long. If you don't believe me, here is the link to the video. You have been warned.
Now wait. Your body is… real estate? Well, that's strange. I've always been under the impressions that Black's Legal dictionary pegs Real Estate as "technically" being:
Real estate includes the land and anything fixed, immovable, or permanently attached to it such as buildings, walls, fixtures, improvements, roads, trees, shrubs, fences, roads, sewers, structures, and utility systems.
A far cry from reality
Now we start to get the whole picture. What likely earned Winston Shrout his indictment was his disregard for a) reality and b) the law of the land. Not only that, but he's urging other people to follow his methods and "beat" the IRS. And for other reasons than not filing his tax returns, it's likely that the IRS sees him as an annoying pest. He's challenging their rule and not grounding any of his certainties in any sort of reality.
Throw together Winston Shroud's failure to file returns, urging of others to also break the law, and utter disregard for the IRS, and all of the sudden he doesn't seem to be such a random target. I have to think to myself that if I were a DOJ attorney and someone as difficult as Winston Shroud was breaking the law, I would want to shut him down with as little room for error as possible.
If the US government was to charge Winston Shrout with tax evasion, he could make more than a few arguments about his intent. Whether he really intended to defraud the US government is an argument that the DOJ would likely win but simultaneously lose because of the vast resources necessary to earn the conviction and have Mr. Shrout exhaust his appeal rights. And, based on the information that Mr. Shrout is sharing with the internet, it wouldn't be too far of a stretch to assume that he'd enjoy the limelight and do everything he could to spend as much time getting as much attention as possible.
However, because the law allows the government to convict Mr. Shrout for willfully failing to file a tax return, that is the easiest way for the government to put him behind bars. Not only that, but it removes all questions of intent and strips away whatever lengthy processes would otherwise be necessary.
Perhaps you aren't as annoying as Winston Shrout, but that doesn't mean you're in the clear. The following are some factors that could indicate that you are at heightened risk of prosecution for your failure to file your tax returns:
Do you have prior convictions involving fraud? If so, the government may be looking at you like you're a bad guy and be more aggressive in charging you with criminal intent.
Are you advising people to be in non-compliance and profiting from it? It is one thing to mistakenly tell people that there is no law that says you have to pay income tax. However, some people aren't happy with just saying that. Some people sell programs that promise foolproof ways to help you avoid taxes. Just the idea of that is problematic – if there was no law that said you had to pay income taxes, why would you need a program to help you do just that? Why wouldn't you just choose to not pay your taxes? Selling a program that needlessly complicates incorrect information is a great way to land you in the IRS's sights.
Are you famous (or infamous)? Can the IRS get a real juicy headline by indicting you. If so, then like it or not, you are at enhanced risk for prosecution.
Don't wait to make things right
The best way to not be hit with a criminal charge regarding your unfiled tax returns is to file them. The IRS is going to assess you anyway, and their substitute for return is probably going to have you paying significantly more than you would otherwise. However, if you already have a few years of unfiled returns stacked up, it's best to get ahead of them. Contact a tax professional and see what you can do to get back into compliance and show the IRS that you have no desire to play games with them. Getting in front of the potential problem is the best way to cause it from ever coming back to hit you full force.
The importance of developing a proper strategy to move forward and show the IRS that you aren't trying to trick them is one of the keys to avoiding any likelihood of criminal prosecution. While the chances of you being indicted for failure to file tax returns are slim, that doesn't mean it's not a possibility. As with any other tax problem, compliance is key. Getting back on the good side of the IRS will help to ensure that your future can be whatever you want it to be. If you find yourself overwhelmed and unsure of how to proceed, don't hesitate to contact us:
*26 U.S. Code § 7203 – Willful failure to file return, supply information, or pay tax
Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution. In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure. In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “felony” for “misdemeanor” and “5 years” for “1 year”.
