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.

Backtracking? Donald Trump announced he is willing to take another look at his tax plan.

Trump Tax Plan v. Clinton Tax Plan

Trump Tax Plan v. Clinton Tax Plan

As previously discussed in this blog about the differences between Senator Bernie Sanders and Senator Ted Cruz’s tax plans (graduated plan with increase taxes on the rich vs. flat tax), in the recent news, Republican frontrunner and presumptive nominee Donald Trump recently announced that he is willing to backtrack on his proposal to cut taxes for the rich while also cutting taxes for the middle class. See this MSN article.

Last fall, Donald Trump initially announced his tax plan.  See this MSN article.  His original plan would significantly reduce marginal tax rates on individuals and businesses, increase standard deduction amounts to nearly four times current levels, and curtail many tax expenditures. See Tax Policy Center’s analysis of the Trump tax plan. 

A closer look at the original proposed Trump Plan shows that the bulk of the tax cuts would be to rich and wealthy.  As stated by Tax Policy Center, “The highest-income 0.1 percent of taxpayers (those with incomes over $3.7 million in 2015 dollars) would experience an average tax cut of more than $1.3 million in 2017, nearly 19 percent of after-tax income.”  Meanwhile the Trump plan proposed only a modest tax cut for the middle class: “Middle-income households would receive an average tax cut of $2,700, or 4.9 percent of after-tax income.” See Tax Policy Center’s analysis of the Trump tax plan. 

In contract to Trump’s proposed tax plan is Senator Hillary Clinton’s tax proposal.  See Senator Clinton’s website, or the Tax Policy Center’s Analysis.  According to the Tax Policy Center, Senator Clinton’s plan would, “increase taxes on high-income filers, reform international tax rules for corporations, repeal fossil fuel tax incentives, and increase estate and gift taxes.”  Senator Clinton’s proposals would have the following estimated effects for 2017: In 2017, “taxpayers in the top 1 percent of the income distribution (those with incomes above $730,000 in 2015 dollars) would see their tax burdens increase more than $78,000, a reduction in after-tax income of 5 percent. Taxpayers outside the top 5 percent (those earning less than $300,000in 2015 dollars) would see little change in average after-tax income.”  See Tax Policy Center’s Analysis of Senator Clinton’s tax plan.

So the question is: how similar is Donald Trump’s new position to Hilary Clinton’s tax position.  While Donald Trump has not given specifics, he is now willing to incorporate  new taxes on the rich.  See this MSN article.

While the MSN article criticizes Trump for his flip flopping on taxing the rich and federal minimum wage, could Trump’s softening of his position be his appeal to the masses, especially now that he has won the primary audience in getting the Republican nomination?  Or is Trump’s position on taxes merely a “read my lips: ‘No new taxes’” maneuvering?

It remains to be seen what the change in philosophy will mean to the tax world and tax practitioners. 

Regardless of which proposed tax plan wins, if you know of any individual or corporation that is underpaying their tax liabilities, you should report the individual or corporation and collect an award from the IRS.  If you have specific and credible evidence, contact us to evaluate your information and whether it would qualify for an award between 15-30% of the collected proceeds in excess of $2,000,000 paid by the IRS.