As explained in the previous article, any illegal source of income exposes the individual to at least two potential sources of criminal liability. This means that a criminal defendant is most likely subject to state and/or federal criminal prosecution for the initial criminal conduct that gives rise to the criminal enterprise. These could include laws as to theft, embezzlement, distribution of illegal narcotics, fraud, virtually any violation of a criminal statute.
The vast majority of people engaged in illegal activities understand the risk of prosecution for their crimes if caught. However, tax attorneys unfamiliar with criminal law should note that the criminal defense strategy as to the underlying crime is crucial to knocking out a related tax evasion charge.
The second source of criminal liability however, is less likely to be considered and will subject a defendant to Federal prosecution: tax evasion. All income must be reported to the Federal government, regardless of its source. This means that while every alleged criminal wants to keep his or her ill-gotten gains secret from the government, they can be prosecuted for failing to do exactly what the IRS requires. It naturally does not occur to most to file taxes on embezzled funds or the proceeds of a wire or mail fraud operation.
Famous Tax Evasion Cases:
This should not surprise anyone. After all, as previously discussed, America’s most famous gangster, Al Capone was convicted in 1931 of income tax evasion. While he was famous as a bootlegger and the mastermind behind one of organized crimes grizzliest murders –The St. Valentine’s Day Massacre— it was tax evasion that the government was most easily able to prove. Capone himself should not have been surprised. The United States Supreme Court had already decided in United States v. Sullivan (1927) that bootleggers must report their income and pay taxes, regardless of the illegal nature of their activities.
The Supreme Court expanded this principle in James v. United States (1961) in upholding a conviction for tax evasion of a man who embezzled funds from his employer and never reported the income. The financial implications for anyone convicted of illegally appropriating funds are stark: if caught the defendant will owe the funds he misappropriated while still owing the Federal government taxes for the income that he stole. In other words, a defendant can be convicted of tax evasion for income he no longer has.
The lesson is simple: anyone facing criminal prosecution for an illegal scheme to make money should consider the income tax implications of his or her conduct. Merely evading prosecution for the underlying crime may not be enough to keep the individual from facing substantial jail time. Sentences for tax fraud can be severe and vary depending on the amount of taxes the individual failed to pay.
The lesson is clear. If you are charged with any illegal business enterprise, you don’t just need a good criminal defense attorney, you need a criminal tax lawyer, or law firm, that focuses in tax fraud and other tax evasion crimes. Ours is one such firm and we handle cases throughout the country, including New York, California, Illinois, Texas and Washington D.C., to name a few.