Business taxation in the country is one of the critical components of corporate regulation. The federal government levies firms a percentage of the number of profits they make over a significant period – usually a year. The scope of taxes varies depending on a wide range of factors, including whether a business is domestic, foreign, tax exceptions, and others. As such, the treatment of various tax obligations is one of the most complex phenomena when running a business in the country. For instance, some believe money is not taxable if it was the cash of a certain amount. Laws and regulations on taxes determine taxable and what is not taxable and further outline penalties for nonadherence to tax obligations.
The client does not know how to differentiate between taxable and nontaxable income. Knowing what to claim as taxable or not taxable reduces one’s tax liability. Typically, nontaxable income will not be taxed whether a person enters it in the tax returns. However, like the client, it is important to determine what is taxable and what is not taxable with a competent tax expert's help. Claims like welfare payments, inheritance, gifts, child support, healthcare benefits, alimony payments, and cash rebates are considered nontaxable claims. That being so, the idea that money received as cash is nontaxable is false. The client should have claimed the amount in the tax returns.
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The regulation that determines requirements for taxation includes the Internal Revenue Code (IRC). The regulation outlines 11 provisions for addressing the federal tax law's substantive and procedural aspects (Skarlatos, 2015). However, common provisions are Subtitle A, B, C, D, and F (Skarlatos, 2015). Subtitle A offers guidelines for imposing and calculating federal income taxes. Subtitle B offers guidelines for the treatment of estate and gift taxes. C is concerned with employment taxes and the procedures for collecting income taxes. Subtitle D deals with excise taxes with F governing the mechanics for administering federal taxes. Thus, the client’s status of tax liability should be confirmed with these provisions.
The government agency charged with the responsibility for handling federal taxation issues is the internal revenue service (IRS). It is a government agency responsible for collecting taxes and enforcing tax laws. The agency ensures all the guidelines provided by all types of tax laws are followed by both individuals and organizations (Animasaun, 2016). As part of ensuring the enforcement of the law, the agency conducts tax audits every year. The process includes auditing filed income tax returns. It does so to ensure individuals and corporations are not involved in tax cheats or illegal dealings as far as filing returns is concerned (Animasaun, 2016). Once they ascertain cases of tax cheats, the agency imposes hefty monetary or nonmonetary penalties.
That being so, the client has violated tax regulations. At first, the client claims he did not file $50,000 because he thought money received in cash is not taxable. Further review of the tax documents reveals that the client earned $190,000 as gross income in the same year instead of $50,000. Gross income refers to all income a person receives that is not explicitly exempted from taxation as stipulated under the IRC. The income the client receives constitutes all earnings from the business as one of the business owners. Thus, it is important to determine and differentiate what portion (if not all the income) is taxable income under IRC provisions.
Taxable income is a portion of gross income that is taxable. It refers to the adjusted gross income (AGI), which is arrived at by subtracting all claims or standard deductions a person is entitled to from the gross income. Gross income covers a diverse range of sources, including salary, tips, wages, royalties, wins from gambling, self-employment, dividends, etc. Some of these sources of income are nontaxable, as indicated earlier in the text. For the client's case, his gross income comes solely from the profits of the business. As one of the business owners, such income may be in the form of dividends, interest, or salary depending on the type of business and nature of business ownership. Thus, all the $190,000 constitutes taxable income, and the client failed to file returns for the income.
The client’s case qualifies as a case of tax evasion. Tax evasion is a crime whereby a person or an organization conceals their financial affairs' true state to tax authorities to escape paying taxes (Hakelberg, 2020). Tax evasion is not to be confused with tax avoidance since the latter is legal. It involves exploiting tax systems to minimize tax liabilities with the example, including starting an offshore company (Hakelberg, 2020). Tax evasion is a major crime in the United States, and it is an area of taxation that the IRS focuses on addressing. Like the client, every citizen has a right to take lawful steps in decreasing their tax liability. However, using legal means is unacceptable. For instance, the client first concealed $140,000 (190,000 – 50,000). Further, he failed to file the $50,000 because he thought it amounted to nontaxable income. In other words, he failed to report taxable income.
Once the IRS detects a case of tax fraud, in this case, tax evasion, they notify the suspected criminal of tax violation through a letter and further conduct an investigation. Thus, it is a matter of time before the IRS detects the client's case and deploys further criminal investigations into the client's financial information. The investigation could open additional tax-related issues from 2015 to 2019, leading to tougher measures. Through law enforcement, the IRS has the power to involve family, friends, relatives, coworkers, neighbors, and spouses in criminal investigations (Animasaun, 2016). The agency can also tap the phone to track money that has moved to offshore accounts. Once the IRS substantiates the crime, facts are declared, and a person or a firm is prosecuted in a court of law.
If found guilty, they face a hefty amount of fine and/or jail time. The client could be charged for three crimes for evading taxes. First, tax evasion includes the broad category of any form of cheating taxes owed to the government. It is a felony that carries a prison sentence of up to five years and/or a fine of $250,000 for an individual (Hakelberg, 2020). Filing false returns occurs when a person passes false information on the tax return. The crime carries a prison sentence of three years and/or a fine of up to $250,000 (Hakelberg, 2020). Not filing tax returns completely carries at least a year of a prison sentence and a fine of up to $100,000 (Hakelberg, 2020). As such, considering the client’s situation, that is, not filing returns at all in 2015, he risks a jail time of a year and or a fine of $100,000.
Tax evasion is a serious issue in any government, especially in the United States. People and corporations have served sentences or settled huge amounts of fines for crimes involving violating tax laws. That said, the client should not be taking legal advice on matters revolving around taxes from non-qualified individuals like brothers-in-law because the law does not consider such instances under their exceptions. Thus, the idea that money received in cash is nontaxable is inaccurate and can amount to serious legal problems. Also, concealing financial information constitutes a felony of tax evasion, and depending on the nature of the crime, a person risks serving a long time in jail or incurring hefty amounts of money in fines.
References
Animasaun, R. O. (2016). Tax Administration and Revenue Generation: A Perspective of Ogun State Internal Revenue Service. International Journal of Innovative Finance and Economics Research, 5 (1), 11 , 21 .
Hakelberg, L. (2020). The hypocritical hegemon: How the United States shapes global rules against tax evasion and avoidance . Cornell University Press.
Skarlatos, B. C. (2015). Avoiding Penalties for Tax Return Positions: IRC Rules for Taxpayers and Tax Preparers. The CPA Journal , 85 (2), 56.
