This week, the First Circuit convicted a couple who received erroneous tax advice from a dentist of tax evasion. United States v. Allen, 1st Cir., No. 10-2160 (Jan. 6, 2012).
Facts:
The taxpayers in this case worked in the health and wellness industry. Specifically, they worked in the field of nutrition and vitamin supplement sales. On the advice of their dentist (which they claim to have confirmed through their own tax research), the taxpayers concluded that the Internal Revenue Code did not require them to pay taxes. They attached an explanation to this effect to their federal tax returns filed during the 1990s.
Beginning in 1998, the taxpayers claimed exemptions from withholding for federal income taxes. As a result, their employer discontinued withholding income taxes from their paychecks. Subsequently, the taxpayers classified themselves as independent contractors (as opposed to employees) such that their employer also discontinued withholding for FICA (i.e. Social Security and Medicare).
In 2000, the taxpayers stopped filing tax returns altogether. This is true notwithstanding their income of at least $100,000 during those years. Moreover, the taxpayers closed out all bank accounts, had their checks made payable either to cash or directly to creditors, and transferred the title to their home to a trust. From this point on, the taxpayers paid all expenses with cash or money orders.
In 2009, the taxpayers were charged with one count of conspiracy to defraud the United States, one count of attempted tax evasion, and four counts of willful failure to file income taxes (i.e. tax evasion). In April 2010, the taxpayers were tried in a joint trial in which they defended against the charges by asserting good faith reliance on their dentist's prior tax advice and good faith misinterpretation of the tax law. Not surprisingly, their argument was to no avail.
To be clear, the established law is that a taxpayer lacks the willfulness necessary for tax evasion if it is honestly believed, based on a misreading of the tax laws, that no taxes are owed. Cheek v. United States, 498 U.S. 192 (1991).
Holding:
Unfortunately for the Allens, however, the jury did not buy their argument. To the contrary, the jury convicted on all counts, and the Court sentenced each of them to three years in prison.
Bottom Line:
Ignorance or misinterpretation of the tax law is not a defense. Nor is reliance on tax advice received from a non-tax professional. So here's the bottom line: Don't give tax advice if you're not a tax professional, and don't rely on a tax position that sounds too good to be true (because it probably is).
