Trump Organization’s Tax Fraud Shows More Than Meets the Eye

Earlier this month, the Trump Organization was convicted of several counts of tax fraud and assessed with upward of $1.6 million in penalties as former president Donald Trump gears up to run for a second term.

Tax fraud is not a term to be tossed around lightly. Being convicted of tax fraud has many negative connotations and comes with a host of other issues, including the assessment of penalties, tax, and potentially jail time. Committing tax fraud also can result in damages that have a long-lasting effect on the individual or business.

Several punitive actions may be taken against the taxpayer due to a tax fraud conviction. First, tax fraud is a crime for which the responsible individuals may face jail time. In addition to the criminal case, the organization or individual will be assessed the additional tax it failed to pay because of the fraudulent actions. The additional tax will be further compounded by the assessment of interest from the date the tax should have been paid to the date the tax is paid. There will also be a penalty of 75% of the unpaid tax.

In the case of the Trump Organization, if the IRS assessed the fine based on the statutory 75% fraud penalty, then one can reason the underpayment of tax on behalf of the organization may have been in the ballpark of $2,133,333.

This tax applies only to the organization. The individuals who benefited from the organization paying expenses on their behalf will also be assessed additional tax, penalties, and interest. The tax the individuals will be assessed will be based on adjusted tax liability after adding additional income to the tax return for the year the organization made the expenditures.

The collection and assessment of additional tax carry a 10-year statute of limitations. There is no statute of limitations for tax fraud; the IRS may choose to open and investigate other tax years. In addition to the limitless time in which IRS may have to assess and collect the tax, the parties involved have also opened themselves up to additional scrutiny not only by the IRS but also by the applicable state revenue department.

The IRS will automatically report the tax return adjustments to the state, allowing the state revenue department to assess additional tax based on the IRS’ findings. The organization may be subject to additional financial scrutiny when trying to gain credit or do anything that requires creditworthiness or financial statements.

Financial consequences aside, being proven guilty of committing tax fraud as an organization can give your company a bad reputation. In Donald Trump’s case, this news of tax fraud may tarnish his brand image as a successful businessman. A New York State Supreme Court jury convicted Trump Corp. and the Trump Payroll Corp. for engaging in tax fraud for 15 years.

Background

Taxpayers inadvertently commit acts of potential tax fraud daily by unknowingly or falsely providing the IRS with incorrect information. This type of activity is referred to as tax negligence because the taxpayer unknowingly provided false information, which is in direct contrast to a taxpayer who knowingly and intentionally provides false information.

Many people don’t know that ignorance of tax law can be a valid defense to the conviction of tax fraud. For example, there was a criminal case in 1991 involving a tax protester, John Cheek, who failed to file tax returns for six years. The IRS put Cheek on trial, and he was convicted of willfully failing to file a tax return and attempting to evade tax. However, when Cheek told the Supreme Court that he believed his wages were not income and that he was not a taxpayer within the meaning of the law, his charges were dropped.

Why were they dropped? The court stated that the more unreasonable the story is, the more likely the jury will not believe the defendant. In Cheek’s case, the jury found his story believable.

So, whether you may have committed tax fraud depends on whether the IRS can prove that you knew what the tax law was and understood what you were doing but continued to commit fraud anyway. For a taxpayer to commit fraud, they must have willfully and intentionally avoided the payment of tax or willfully and intentionally avoided the proper assessment of tax.

To be convicted of tax fraud, the government must prove willfulness, defined as intentional and voluntarily avoiding tax by performing any of the following acts:

• Creating false documents or records;
• Not reporting substantial amounts of income over several years;
• Maintaining multiple sets of books;
• Destroying books and records;
• Overuse or spending of cash;
• Making false statements to IRS agents;
• Having a history of conspicuous tax behavior;
• Improper dating of tax documents;
• Having bank accounts under false names.

Tax negligence and tax fraud come with their own punitive outcomes. Tax negligence is typically met with penalties and the assessment of the underpaid tax. The IRS will assess the taxpayer with the additional tax based on computing the correct amount of tax after adjusting for the fraudulent items. The taxpayer also will be assessed a negligence penalty based on 20% of the underpayment of tax.

Whether you’re a business or filing taxes on your behalf, you do not want to commit tax fraud or tax negligence. You could be paying the consequences for the rest of your life. Thankfully, there are legal ways you can avoid paying huge amounts of money in taxes by using tax strategies.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Karla K. Dennis is an enrolled tax agent licensed in all 50 states, business consultant, and founder of Karla Dennis and Associates, Inc. She holds a master’s in taxation and specializes in working with real estate investors from all over the country.

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