Tax Fraud or Tax Avoidance?

Lionel Messi

Lionel Messi

There is a joke among tax practitioners, namely: What's the difference between tax evasion and tax avoidance?  Answer: About $100,000 and a competent tax attorney.  While this may be a party joke, there are real world examples of this joke playing out.

Case 1: Lionel Messi and Tax Fraud Trial.

In the sports/tax news, Lionel Messi, a world renowned soccer player, testified in his tax fraud case before Spanish authorities. See SI article

Messi stated that he didn't know he wasn't paying his taxes, and that he would sign anything his father put in front of him, because he trusted his father.  With respect to tax issues, this blind dependence/trust in a person with the power of preparing your tax returns is known as willful neglect, and unfortunately it will not relieve you of your obligations to file and pay your tax liabilities.

In the United States, Internal Revenue Code Section (I.R.C. §) 6651 imposes an additional penalty for failure to file your tax return, and failure to pay your tax liability as shown on your tax return.  I.R.C. §  6651 contains a reasonable cause exception, but that must be raised by the taxpayer based on the facts and circumstances.  Noteworthy to this discussion, is that Lionel Messi's dependence on his father would not rise to the level of reasonable cause for exempting Lionel Messi from this additional penalties, because merely trusting or depending on someone does not relieve a person from their tax return filing and tax paying obligations.

Willful Neglect is defined by the United States Supreme Court as "a conscious intentional failure or reckless indifference to the filing requirement."  United States v. Boyle, 469 U.S. 241, n.3 (1985)  Ignorance of the filing requirements is not an excuse for failing to file a tax return. 

While Spanish tax laws may be different than the IRS rules and regulations, Messi's case reflects that blind trust in your advisors and/or family members does not eliminate your obligations to file tax returns and to properly structure your business affairs.  Note, the SI article states that Messi and his father are facing three counts of tax fraud and could be sentenced to nearly two years in prison if found guilty of defrauding Spain's tax authority of 4.1 million euros ($4.5 million) from 2007-09. The SI article points out that Messi and his father are not likely to face any jail time but could be fined and made to forfeit possible future tax benefits, and that both deny wrongdoing, and the money owed was already paid back.

Case 2: Donald Trump Tax Avoidance through the use of Delaware entities.

Contrasting Lionel Messi's situation is Donald Trump, the presumptive Republican nomine for President of the United States.  In recent news, Donald Trump has pooled 110 registered or pending trademarks and placed them into a new Delaware based (DTTM Operations LLC).  This Bloomberg article points out that this maneuver would permit Donald Trump to escape other states' income taxes on royalties paid for their use, which would be an income stream worth tens of millions.

Additionally, the article highlights ways that Donald Trump may have reduced his tax rates by utilizing foreign entities by shifting some of the trademarks to Ireland.  The Bloomberg article also provided possible other reasons for the consolidation, including debt financing and estate planning.

The significance of this second case when compared with the first case is that with proper tax planning, what appears to be tax fraud with the Messi case, is likely just proper prudent tax planning in the Donald Trump case.

Not all tax planning is proper, if you have specific and credible evidence of improper tax planning or fraud, contact us to discuss your case.  The IRS pays an award between 15-30% of the collected tax, penalties and interest for substantial and credible information provided by a whistleblower.