Dorf on Law

Mostly law-related musings by Cornell Professor Michael Dorf and some of his lawyer/professor friends

Sunday, February 03, 2008

The High Cost of Not Paying Taxes

As many news outlets have reported (see a helpful list here), the actor Wesley Snipes was convicted last week on three misdemeanor counts and acquitted on three other misdemeanor counts as well as two felony counts in connection with non-payment of taxes -- evasion which grew from his involvement with a group that claims that people are not required to pay taxes.

I wish that I could say that I had predicted the generous baby-splitting in which the jury apparently engaged, but as I argued during a short appearance on CNBC when the trial was beginning (video here), this case looked pretty grim for Snipes. I allowed, of course, that a jury can always buy into a bad argument; and I also pointed out that being an actor had to be a bonus for Snipes as he tried to convince the jury of his sincerity (to say nothing of the benefits of being a celebrity in our tabloid-driven culture).

Still, the outcome must count as a surprise, because the case against Snipes was very strong. Given that his only defense was to claim that he sincerely believed that he did not have to pay taxes, most observers thought that Snipes would have a very difficult time explaining why, among other things, he sent the IRS fake checks in payment of his taxes.

Moreover, as a matter of trial strategy, Snipes's two co-defendants (who had sold him on the idea that taxes are voluntary) would simultaneously be trying to convince the jury that they sincerely believed that their tax theories were not crazy. Given that Snipes's own lawyers referred to those theories as “kooky,” “crazy” and “dead wrong,” Snipes would be left trying to say that he had been convinced of these nutty theories by two men who would argue to the jury that they were deluded enough to believe their own rantings. Snipes thus would need to pull off a neat trick: getting the jury to believe that he sincerely believed two men who were demonstrably unhinged from reality.

As it turned out, the jury did not hear from one of the defendants (who refused to recognize the authority of the court), and Snipes's attorneys rested without calling any witnesses as part of a minimalist approach. Even so, the jury was extremely generous to Snipes, given the evidence against him.

For Snipes as an individual, of course, the split decision has to be viewed as a huge victory. His potential jail time has now dropped from 16 years to 3, and it is imaginable -- though unlikely, given the sentencing guidelines and this being such a high-profile case -- that he will do no time at all. He can also continue to say that he is not a felon, which is worth quite a bit.

While this verdict is a personal win for Snipes, though, is it "a huge victory for the tax protester movement," as the TaxProf blog put it? I have little doubt that many tax protesters are celebrating, which means that TaxProf probably has accurately characterized the views within the movement itself. I would argue, however, that such a view is -- like so much else in the tax protesters' playbook -- a serious distortion of reality.

The Snipes trial was never about whether he had to pay taxes. (If it were, after all, his lawyers would have committed malpractice by arguing that their client's reasons for not paying taxes were insane.) The question for the jury was entirely about whether he would do jail time, not whether he had any tax liability. Snipes will now have to pay those taxes as well as interest and penalties; and the jury's verdict in a criminal trial is totally irrelevant to that simple fact of civil tax law.

Therefore, we might take a moment here to consider what Snipes lost by denying that he had to pay taxes. I have not seen any reports of his ultimate tax liability, but reports do indicate that he did not pay tax on $38 million in income over a number of years. As a rough guess, he might have owed about $14 million in taxes on those earnings. If so, he now must pay that $14 million in back taxes, plus interest charges (which are not punitive but merely prevent taxpayers from making a profit by taking frivolous tax positions and then putting their unpaid tax liabilities in interest-bearing accounts while the process plays out). In addition, Snipes will face penalties ranging from 20% of the unpaid taxes (if his lawyers are able to convince the IRS that Snipes's underpayments were due to "negligence," which is a huge stretch) to 75% if the underpayment is due to fraud (as seems clear). "Failure to file" also carries separate penalties that could run as high as 100% of the tax due.

As in all such instances, we cannot know the precise outcome without further information; but it at least seems plausible that Snipes will be required to pay another $10 million or more. His attorneys' fees surely added up to millions of dollars as well. Finally, he is now a convicted criminal, which is not only a blot on his record but can cause problems in a variety of circumstances (such as foreign travel, which is particularly important to a movie actor).

In short, even if Snipes manages to avoid jail time (which I hope he won't), the price he will pay is steep. In an attempt to evade $14 million in taxes, Snipes must now pay that amount in full plus interest plus penalties probably exceeding $10 million, plus legal fees, all while now carrying a criminal record. Add in the years of uncertainty that this prosecution caused Snipes, as well as the personal toll of a trial carrying the possibility of 16 years in prison, and this does not look like an advertisement for getting into the tax denial game.

Everyone is free to engage in their own cost/benefit analyses, of course, but how would anyone conclude that going down this road was a winning proposition?

Posted by Neil H. Buchanan

13 Comments:

  • At 1:45 AM, Blogger Evan said…

    Unfortunately, I imagine the possibility of non-enforcement (which has to much higher for those falling under the $38M + being Wesley Snipes bar) coupled with the possibility of ROI above the interest rate might still provide some incentive to the "tax averse" among us. A dose of proper jail time might be crucial here.

     
  • At 1:45 AM, Blogger Evan said…

    This post has been removed by a blog administrator.

     
  • At 2:37 AM, Blogger David C. said…

    In defense of Snipes, the Federal Government has a history of framing him. Indeed, I think we all remember the miscarriage of justice that Snipes suffered when he was falsely accused of murdering two U.S. agents. If not for the intrepid efforts of a U.S. Deputy Marshal---Sam Gerard---Snipes might be spending time on death row along side another criminal justice victim, Harrison Ford. The histories of these shameful events were captured in the masterful documentaries "The Fugitive," http://www.imdb.com/title/tt0106977/,
    and "U.S. Marshals," http://www.imdb.com/title/tt0120873/.

    So, before we rush to judgment, I think we should give Snipes an opportunity to flee the federal authorities and clear his name. Only then can we be sure of the truth. (Now that Gerard has semi-retired to Texas, though, http://www.imdb.com/title/tt0477348/, Snipes might have a harder time.)

     
  • At 10:23 AM, Blogger Neil H. Buchanan said…

    The post by evan raises some good points. It's imaginable that the calculus could be more inviting for someone who's not a movie star. As it turns out, though, the numbers are (appropriately) tilted against even an average Joe -- who doesn't have a lot of extra money, unlike millionaire actors -- making such a choice.

    For example, the current interest rate (compounded daily, charged on any unpaid tax from the due date of the return until the date of payment) is 7%. (The rate is re-set quarterly by adding 3% to the federal short-term interest rate.) It's possible to beat that rate, but it's high enough to be a long-shot.

    As to being detected in the first place, the very nature of frivolous tax positions is that they're aggressive and easy to detect. For example, sending in a return claiming zero income is not subtle.

    Furthermore, even "regular people" are frequently prosecuted for tax fraud and sometimes go to jail. As Judge Posner put it in one case: “Like moths to a flame, some people find themselves irresistibly drawn to the tax protester movement’s illusory claim that there is no legal requirement to pay federal income tax. And, like moths, these people sometimes get burned.” United States v. Sloan, 939 F.2d 499, 499-500 (7th Cir. 1991). For general information on penalties for taking frivolous tax positions, see http://www.irs.gov/taxpros/article/0,,id=160687,00.html.

    A person might decide to risk all of this; but you have to be very committed to making a point at great personal cost and risk.

     
  • At 3:52 PM, Blogger egarber said…

    Hi Neal.

    I have a Libertarian friend who tells me your tax form violates the fifth amendment because it forces you to "testify against yourself" (via the "under threat of perjury" language).

    It has always been pretty evident to me (and I'm not even a lawyer!)that the tax form is part of a CIVIL transaction with the government, not a criminal proceeding.

    Can you elaborate on the legal reasons for why this tax protester position is phony?

    thanks!

     
  • At 3:52 PM, Blogger egarber said…

    oops. I mean NEIL. sorry.

     
  • At 4:37 PM, Blogger Neil H. Buchanan said…

    In response to egarber's question about the 5th Amendment's self-incrimination clause, this argument was rejected by the Supreme Court over 80 years ago in United States v. Sullivan, 274 U.S. 259 (1927). As egarber surmises, the key is the civil/criminal distinction. The right not to incriminate oneself means that one cannot be compelled to testify against oneself in a criminal trial. Filling out a tax return provides information to determine civil tax liability.

    If a taxpayer is ultimately prosecuted for criminal tax evasion, the information provided on a tax return would be part of the proof that a person did not pay taxes owed, but the question in the criminal trial is about mens rea. A defendant cannot be compelled to testify that he knew he was breaking the law, that he conspired to break the law, that he lied about whether he was breaking the law, etc.

    Tax information is simply not in that category. In United States v. Schiff, 612 F.2d 73, 83 (1979), the Second Circuit said that "the questions in the income tax return are neutral on their face."

    Again, all of these arguments have been rejected over and over again for decades by judges from across the political and ideological spectrum. That egarber's friend appears actually to believe the argument is testimony to the power of wishful thinking.

     
  • At 4:50 PM, Blogger egarber said…

    That egarber's friend appears actually to believe the argument is testimony to the power of wishful thinking.

    Or testimony about my choice of friends :)

    Thanks for your very informative reply.

     
  • At 6:02 PM, Blogger egarber said…

    Just so I understand, let me put this in my own words:

    When a tax form reads "under threat of perjury", that's basically the government saying, "look dude, we're asking for some facts here in this civil transaction. But if you lie, you could face criminal charges, just like you could if you lied on an affidavit (regarding your annual income, for example) during divorce proceedings. If you're indicted, we can't make you testify against yourself on the criminal charges, but we can certainly make you answer questions in the preceding civil environment."

    Is that about right in layman's terms?

     
  • At 10:59 PM, Blogger Sherry F. Colb said…

    Hi egarber. Just to add a small point on the self-incrimination question. The Supreme Court has held that to qualify as a violation of the 5th amendment, the government must have engaged in "compulsion" of "testimony" that is "self-incriminating." Because demanding that a person provide accurate information -- by definition -- does not *compel" perjury, a prosecution for perjury involves prosecution for a person's noncompelled false responses to a question that did not call for such false responses. A more difficult question arises when people engaged in criminal business are required to file tax returns (which they are indeed required to do). They have claimed that the federal government is now compelling them to report income that is from a crime, and such a report is therefore compelled, self-incriminating, and testimonial (the 3 requirements for implicating the 5th amendment). The Court's somewhat unpersuasive response is that in general, asking people to report their income does not call for self-incriminating evidence. I find this unpersuasive because, as others have noted, few questions inherently call for self-incrimination from the majority of the populace. The ordinary 5th amendment question is asked at the individual level -- would my answering this question provide a link in a prosecution against me. The Court's answer to this point is simply that one could not run a government if this position applied to tax returns (or, as another example in the case law, if it applied to hit and run statutes that require people involved in accidents to leave their name at the scene). On the criminal/civil question, it actually doesn't matter much whether one is asked a question in a civil or a criminal context; what matters is whether a truthful answer could provide evidence against the person in a (future) criminal case. For that reason, we all have the right to "plead the 5th" if we are called to testify in a manner that would implicate us in a crime, even if the forum for the testimony is a civil forum. The crucial distinction seems to be between individual testimony in a formal setting versus filling out forms that everyone must fill out as part of a state system that runs largely on self-report rather than auditing (of which the tax system is obviously an important example).

     
  • At 7:42 AM, Blogger egarber said…

    Sherry, thanks so much for the detailed answer.

    Combining everything, I'm going to try to summarize:

    1. We have a right to protect ourselves from criminal self-incrimination in any setting -- civil or criminal.

    2. For the vast majority of tax filers (who face no impending criminal investigation for anything tax related), filling out a tax form is a purely civil matter -- and it's simply frivolous to invoke the Fifth.

    Are 1 and 2 about right?

    3. Here's where I'm a little fuzzy. For those in a gray area who have committed crimes, where filing *could* be considered compelled testimony at least conceptually, has the SCOTUS still concluded that there's no Fifth Amendment violation in filing? I guess a more simplistic way for me to ask is: within current precedent, is there ANY circumstance where forcing someone to merely file a tax form could violate the Fifth?

    Please forgive me for my incessant questions.I'm expecting Mike to block my blog access any day now :)

     
  • At 8:22 AM, Blogger Neil H. Buchanan said…

    In response to egarber's most recent comment, I'm planning to post on these issues in a few days. I'll incorporate answers to your questions.

     
  • At 9:02 AM, Blogger egarber said…

    I should refine my post from yesterday. Here's my corrected version:

    When a tax form reads "under threat of perjury", that's basically the government saying, "look dude, we're asking for some facts here in this civil transaction. But if you lie, you could face criminal charges, just like you could if you lied on an affidavit (regarding your annual income, for example) during divorce proceedings. If you're indicted, we can't make you testify against yourself on the criminal charges, but we can certainly make you fill out a tax form in the first place within the preceding civil environment."

     

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