11

Hypothetically, A wants to pay B a considerable amount of money.

In order to reduce the paper trail, A pays me the money and I transfer it to B.

To further obscure the paper trail, I declare the payment from A as income for work (non-existent) done by me for A, enter it on my US Income Tax return as taxable income, and pay the resulting tax.

I have submitted a false tax return, but it leads to an increase in tax paid. Is it still a crime?

Edit: No money laundering. A legally possesses the money and has a perfectly legal (and very private) reason to pay it to B.

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    Money laundering is a different crime than tax fraud, but still a crime. – SJuan76 Apr 5 at 22:24
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    How do you know that your 20% tax bracket was greater than the tax bracket of person B? Either way this is a fraud against the US government. I would assume that they didn't want a paper trail because they have an outstanding debt like child support. Even if it wasn't money laundering it's still fraud. – Ron Beyer Apr 6 at 3:25
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    "A legally possesses the money and has a perfectly legal (and very private) reason to pay it to B." - That is not good enough. Just evading reporting requirements is already structuring, a form of laundering, even if there is no underlying crime. – Kevin Apr 6 at 6:30
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    This seems like a rare non-tech example of the XY problem. – Justin Lardinois Apr 6 at 7:54
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    @DJohnM B's tax bracket is relevant because you said this: "I have submitted a false tax return, but it leads to an increase in tax paid." It leads to an increase in tax paid by you, but may result in a reduction in the combined tax paid by you and B. – Anthony Grist Apr 6 at 8:11
19

Money Laundering

The primary crime that you have described is called money laundering.

Note that money laundering includes: "structuring financial transactions in order to evade reporting requirements."

Unlike some other forms of money laundering, this does not require that the source of the funds be criminal, or that the actual transfer be criminal, so long as it is intended to avoid reporting requirements. Along the same lines is the even less obvious offense of smurfing.

So, this does not cease to be money laundering because: "A legally possesses the money and has a perfectly legal (and very private) reason to pay it to B."

The transfer would typically have had to be reported on a Form W-2 (wage and salary income), a Form 1099 (most transfers that are usually taxable income), a Form 709 (gift tax return), a Form 1098 (mortgage interest), or 1040 Schedule A (deductible payments), or on a cash transaction form if conducted in that manner. The fact that you are reporting it as income, and that there would have been some disclosure requirement if paid to person B, implies that there is some reporting requirement that is avoided.

Tax Crimes

There are also multiple tax related crimes that could be implicated, not all of which require that taxes due by the person charged by reduced. See, e.g., Conspiracy to Defraud the United States (18 U.S.C. § 371); Attempts To Interfere With Administration of Internal Revenue Laws (I.R.C. § 7212); Fraudulent Returns, Statements or Other Documents (I.R.C. § 7207); Identity Theft (18 U.S.C. § 1028(a)(7)), etc.

Conspiracy to Defraud the United States, for example, is defined as follows:

If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.

If, however, the offense, the commission of which is the object of the conspiracy, is a misdemeanor only, the punishment for such conspiracy shall not exceed the maximum punishment provided for such misdemeanor.f

"Conspiracy to defraud the government is a very broad concept." Tax Crimes Handbook at 132.

Conspiracy to defraud the government is not limited to efforts to obtain money or property, but includes conspiracies where the object of the conspiracy is to obstruct, impair, interfere, impede or defeat the legitimate functioning of the government through fraudulent or dishonest means. Thus, conspiracy to defraud is not confined by reference to common law definitions of fraud. It is a separate crime to interfere with the lawful functions of the government without regard to the monetary consequences. Thus, § 371 involves both efforts to defraud the government of funds as well as interference with the lawful function of the government.

The conspiracy to defraud prong of § 371 includes conspiracies to impede, impair, obstruct or defeat the lawful functions of the Treasury Department in the collection of income taxes. United States v. Klein, 247 F.2d 908, 915 (2d Cir. 1957), cert. denied, 355 U.S. 924 (1958). Arguments have been presented that § 371 was not intended to encompass conspiracies to violate the internal revenue laws or conspiracies to defraud the Service but these arguments have been rejected.

Although decided in 1957, Klein is the leading case regarding conspiracies to impede and impair the Service and such conspiracies are commonly referred to as "Klein conspiracies." In Klein the defendants were acquitted of the tax evasion charges but were convicted on the conspiracy count. The wording of the conspiracy count read, in part, as follows: "... to defraud the United States by impeding, impairing, obstructing and defeating the lawful functions of the Department of the Treasury in the collection of the revenue; to wit, income taxes." In part, it was alleged in Klein that as "part of said conspiracy that the defendants would conceal and continue to conceal the nature of their business activities and the source and nature of their income." The defendants concealed the source and nature of their income by altering and making false entries in their books, filing false income tax returns, and providing false answers to interrogatories.

Thus, a money laundering plan may result in a conspiracy to obstruct the Treasury. United States v. Sanzo, 673 F.2d 64, 69 (2d Cir.), cert. denied, 459 U.S. 858 (1982). In Sanzo, one defendant argued that there was no direct evidence that the other party to the plan would not report the laundered money or claim deductions. The court felt there was enough circumstantial evidence from which the jury could find that the defendant knew his accomplice would not report large sums of laundered money as income and that he would have to falsify business records to hide the laundering activities. Sanzo, 673 F.2d at 69. Note, it is not necessary to prove that the Service was actually impeded in its efforts to assess and collect the revenue.

Tax Crimes Handbook at 132-136 (in the pertinent parts, with most citations omitted).

Caveat Regarding Legal Alternatives

It is also worth noting that there are legal ways for person A to transfer money to person B without making it apparent, for example, in his check book or on his tax return that the funds were transferred to person B (exactly how is beyond the scope of this answer).

Generally speaking, they are distinguishable because the IRS is fully and accurately informed of what is going on in a way that the IRS is not allowed to disclose publicly.

But, the crude method used here does not achieve that end.

  • Some of those are quite a stretch. Defraud the United States: Defraud is a verb that describes a practice of lying to someone or an institution to steal money specifically. It doesn't seem to apply to this question. – Kevin Fegan Apr 7 at 7:19
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    @Kevin Fegan 18 USC 371 is quite broad, and "fraud" can mean any situation in which a false statement is mas to gain an advantage or to inflict harm. (18 USC 371 also covers conspiracy to commit an offense.) Making a false tax return in order to avoid criminal scrutiny could certainly could be considered an instance of fraud. If it results in a financial advantage, even more so. Other statutes including, 18 USC 1001, make any knowingly false statement in a tax return penalizable. – David Siegel Apr 7 at 14:43
  • @KevinFegan Expanded answer to address this concern. – ohwilleke Apr 7 at 14:58
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    @Harper: As a basic principle of law, someone asserting that a thing is legal doesn't make it legal. Anyway, the crime described by this answer is in the way the taxes are handled, not in the original transaction. – user2357112 supports Monica Apr 7 at 20:12
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    It is a crime to "conceal the nature of their business activities and the source and nature of their income" even if it is legal. Privacy is not a legal justification to make a false statement to a government agency (the IRS), absent express statutory exceptions (such as donor advised funds). – ohwilleke Apr 8 at 17:44
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I have submitted a false tax return

Provided it really is false, you violate 18 USC 1001:

(a) Except as otherwise provided in this section, whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully—

(1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact;

(2) makes any materially false, fictitious, or fraudulent statement or representation; or

(3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry;

shall be [sentenced in various ways]

It's "material" because it impacts the amount of tax you owe. The fact that it is detrimental to you is entirely irrelevant. Also, the exceptions in sections (b) and (c) are clearly inapplicable here, as neither applies to executive branch "matters" at all.

(There are numerous more specific laws that you probably also violated. I just wanted to ensure that it's abundantly clear that lying on your tax return is illegal, by some law or another, in almost any scenario you can imagine.)

  • The legislative or judicial prongs of (a) are highly relevant to illustrate that direct economic harm to the government isn't required. – ohwilleke Apr 7 at 15:38
  • Let me present a strawman. There's a poster on another stack, who believes 100% of everything OP says is canonical. He would say that since OP tossed out "false tax return", every answer must worship that and we must rigidly discard the fact that OP doesn't know what he's talking about. I don't agree with that strawman. I think "false tax return" is OP's weakest claim, and the rest of the (edited) post does not support it. Besides, you're allowed (required!!) to report "illegal income" and can simply claim the 5th. – Harper - Reinstate Monica Apr 7 at 18:52
  • @Harper: If the tax return contains any material, false statement, it violates the law. If it doesn't, it might or might not violate some other law, but that was not the question. – Kevin Apr 7 at 19:12
  • @Harper: This is not a tax law at all. It's a felony. – Kevin Apr 7 at 19:54
  • Yes, I see. It's the one they used on Bill Clinton (about Lewinski) when they found nothing on Whitewater. I think its application in a tax case would be violently dependent on the underlying circumstances, about which OP has been silent so we can't know. So I see your point; not knowing, it's best to bring it up. – Harper - Reinstate Monica Apr 7 at 20:06
6

I don't think any of it is a crime

And it sounds like a lot of work to me. Getting overpaid for it doesn't make you a crook, just one of many overpaid people in society today.

Remember, you assure us this is legal, and the only part you are questioning is routing it through you.

He can pay you money for any service, or to sleep on the job, or simply to abstain from something (classically: mistress hush money), except for certain illegal reasons. I haven't heard you state any evidence of an illegal reason, though there may be evidence you have not stated.

The only allusion of crime is you claiming "false tax return" and you could be wrong. You're not a tax attorney. You aren't 100% sure if the income is taxable or what even constitutes a false tax return. Be clear: If in doubt, IRS wants you to declare the income. You don't need to be super specific, in fact, IRS is looking for 2-3 word answers to detect filing errors, not a confession.

Believe me, if they want to know, they'll ask, but it's rare for IRS to chase details on declared income when they don't dispute the amount.

You might be under-reporting deductions, but that's allowed. It's not illegal to not know every deduction you're allowed. It's also perfectly legal to strategically skip or reduce a deduction. *

As a final catch-all, one can report illegal income. If you correctly invoke the 5th Amendment, this becomes a no-questions-asked bucket for reporting any dubious income. But IRS might leak your tax return to the police, who might then poke around.

Amusingly, one can even claim illegal expenses.

We can exclude the Step Transaction Doctrine

If doing something in one step is illegal, and you do several steps that have the same effect, then the steps are illegal.

You are assuring us that the single step is legal, so that means it is legal to split it into steps. However, that does not automatically make each of the steps legal.



Examples.

You're allowed to donate $2800 to a candidate's primary election. You give $2800 to a friend for him to donate to that same candidate. The "step trqnsaction doctrine" says that's the same as you giving $5600, and you are over limits!

You get $1,000,000 cash selling meth. It's impossible to legally deposit the whole lump without explaining the source. So you deposit $5000/day (structuring) or buy a car wash and sell washes to phantom customers (laundering).

Here's the exception that proves the rule. Your income is too high to be eligible to contribute to a Roth IRA. You contribute $5000 to a NDIRA (no income limits). You immediately convert the NDIRA to a Roth (Income limits were removed in 2005). That was long thought to be illegal because of the Step Transaction Doctrine, but IRS and Congress have stated that it's OK.

In the above example, the $1M is illegal because it's from meth. If it was from a legal source you refuse to explain, it's not a crime but they impound your money whilst you still need to timely pay quarterly tax (1040ES) on it. Ouch.


* And I have personally tested that theory in tax court. I reduced my Schedule A deduction of state taxes to just below the AMT threshold. I also aimed to not pay tax on that much of next year's refund. IRS lawyers cheerfully affirmed my entire plan was valid, and let me write it into the judge's order.

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    I'm not positive, but I don't think that depositing your 1,000,000$ is actually illegal. Of course, making meth is (presumably) illegal, and that money might be illegal, since it's from an illegal act. The deposit is probably going to get you investigated, but I don't think the amount is intrinsically illegal. I think the illegal act would be depositing it in chunks of 5000$ to avoid being noticed. – Patrick M Apr 6 at 17:58
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    @PatrickM It's illegal without explaining the source. – Harper - Reinstate Monica Apr 6 at 18:16
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    So you deposit the cash without explanation, the gov't a) seizes the money and b) pokes around looking for criminal activity. They never return it. To get it back you must sue, explain your source, and grind through the courts for years. But right now, IRS wants quarterly 1040-ES taxes paid on it. (And you don't have it). To avoid paying tax on every penny you must be able to prove your deductible a) expenses and b) cost of goods sold. Which again means explaining the source. – Harper - Reinstate Monica Apr 6 at 18:30
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    True. It's a terrible idea. I was just pointing out that it's probably not technically illegal. Just stupid. You mention civil forfeiture, and it's likely they'll do that, but just because you can't prove the money is legal, doesn't mean you've committed a crime. – Patrick M Apr 6 at 18:49
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    @PatrickM Okay. I buy that. If everyone had forethought they would never, ever do this; however people often do things without considering consequences, and that's not a crime. – Harper - Reinstate Monica Apr 6 at 19:43

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