Check Cashing, Tax Evasion, Structuring and Asset Forfeiture; The Making of a Bad Day
The following fact pattern should is representative of a tax evasion and structuring case. A taxpayer receives checks in the ordinary course of business from customers. Some of those checks are deposited into the business bank account and some are cashed. The cashed checks don’t equal or exceed $10,000. The cash is then deposited into non-business accounts or otherwise used by the taxpayer. It never hits the books. The taxpayer using this method hopes to avoid the currency reporting rules under the Bank Secrecy Act and avoid income tax by under reporting income from the cashed checks. The Appellate Court case of U.S. v. Sperrazza illustrates what happens when a taxpayer gets caught.
“Dr. Robert Sperrazza was convicted of three counts of tax evasion, in violation of 26 U.S.C. § 7201 and two counts of structuring a currency transaction, in violation of 31 U.S.C. § 5324(a)(3). The district court sentenced him to 36 months imprisonment and ordered him to forfeit $870,238.99”
Dr. Sperrazza, had a very bad day when he was indicted. He thought that he found a fool proof system of avoiding tax and avoiding the currency transaction reporting rules. What he did not figure on was the law against “structuring”.
The court further stated:
“First, we agree with the Government that Sperrazza’s conduct places him “at the dead center” of the class of persons at whom 5324(a)(3) is directed. Law enforcement officials use the currency transaction reports filed by financial institutions to track down criminal activity. See Lang, 732 F.3d at 1247. Here the evidence shows Sperrazza structured transactions in order to disguise his tax evasion”
The court affirmed Dr. Sperrazza’s conviction and the forfeiture of assets.
Dr. Sperrazza is a paradigm of “intentional/willful” conduct. Had he gone one step further and opened an “foreign” financial account or used foreign asset protection structure (such as a foreign trust) he might have found himself afoul of the foreign financial account reporting rules under the Bank Secrecy Act for he would likely have failed to timely file a Report of Foreign Financial Account (“FBAR”) and related income tax forms. He would therefore be subject to even greater penalties and a longer sentence.
Regardless of whether there is an international dimension to the fact pattern or not, the methods by Dr. Sperrazza are somewhat common. Whether the taxpayer is a professional, or entrepreneur the temptation to under report income is to some, overwhelming. Which brings up the issue of how does the IRS determine how much income is under reported.
The IRS has multiple methods of reconstructing income to maximize the estimated tax loss to the government. The incentive for maximization, is obvious, but includes, longer sentences, greater deterrence publicity and a larger potential tax recovery.
Prior to an audit or other investigation, a taxpayer can come forward and make a voluntary disclosure. To make a voluntary disclosure a taxpayer should retain counts and provide all the relevant books, records and estimates of under reported income so that counsel can have an accurate estimate of taxable income prepared. Counsel can then use a skillfully prepared estimate to negotiate with the IRS and minimize adverse outcomes.
In the event of an audit or worse yet a criminal investigation, a taxpayer should retain counsel and let counsel handle all communications with the government.
