Taxpayers and their accountants sometimes believe that tax evasion, especially criminal tax evasion, is reserved for “the big guys”. While the IRS likes to go after the big fish, even the minnows can get caught in the net. Take the case of Orlando Cardoso. He was a manager of the scallop division at an unnamed seafood processor in New Bedford, Massachusetts.
It appears from the indictment that something fishy was going on. Cardoso was receiving payments from his company’s supplier in 2012 and 2013. He deposited those payments, which came in the form of cash and checks, in his Bank of America account. Perhaps not surprisingly, he didn’t report those payments on his income tax returns.
The reasons why he didn’t report the payments is undisclosed, but any one or a combination of factors could have been at play.
- Greed: It’s always a motive. Why share with the government a portion of what doesn’t belong to it?
- Ignorance: Assuming, as I suspect, that these payments were illegal kickbacks Cardoso might have believed were not taxable income. Unfortunately, the United States Supreme Court decided many, many years ago in James v. United States, 366 U.S. 213 (1961) that even illegal income is taxable and must be reported on your income tax return. Interestingly, the James case overturned an earlier case, Commissioner v. Wilcox, 327 U.S. 404 (1946), which had said that embezzled funds were not “includible” in income by a taxpayer in the year of receipt since the embezzler had an obligation to repay the funds.
- Fear: Cardoso might have thought that had he reported the receipt of the funds on his tax return that he would be admitting that he committed another crime. Taxpayers in this situation do have an option. Cardoso could have filed a so-called 5th Amendment return. Although it is clear that a taxpayer has no right to file a tax return on the grounds that something in the return might incriminate them, they do have the option of filing an otherwise accurate return and “taking the 5th” as to the source of the income, or perhaps specific line items on the tax return.
- Loathing: [With a nod to Hunter Thompson]. It’s closely related to greed; as in many people loath paying taxes.
- Hope: Cardoso may have hoped that the IRS wouldn’t notice that he failed to report the income. After all, tax audit rates are quite low, and it wasn’t likely that anyone was going to bring these payments to the attention of the Internal Revenue Service. As someone else has said: “Hope is not a strategy.” I always point out to our clients that while the tax audit rate may be low, if you are audited, the rate jumps to 100%.
Cardoso pled guilty to two counts of filing a false tax return. Willfully filing a false tax return is illegal under Internal Revenue Code Section 7206(1), and carries with it a maximum sentence of 3 years in prison, and a maximum fine of $100,000. Cardoso, however, was sentenced only one year of probation, of which 10 months was required to be served in home confinement. He was also ordered to pay restitution, of approximately $25,000. Lest anyone think he got off lightly, there is the issue of collateral consequences. All convicted felons face the following problems:
- The loss of the right to vote;
- Revocation of professional licenses, such as those for CPAs, attorneys, and doctors;
- The loss of the right to bear arms;
- Loss of employment; and
- Deportation of a green card holder AFTER jail time has been served.
Cardoso might have avoided some of his criminal tax problems if he had consulted with a criminal tax attorney early on.