Most Famous Tax Court Cases In IRS History That You Might Want to Know

Everyone wants to save money, especially when it comes to taxes. It is not illegal to reduce or minimize business or personal income taxes by legitimate accounting methods. There are, in fact, many exemptions and deductions available under state and federal tax codes to help you minimize your taxes. 

However, when you use deceptive or dishonest methods to save money on taxes, you risk facing significant penalties and perhaps jail time. Even if only a tiny fraction of returns are audited each year, the fines are not worth the risk. 

This article will introduce you to the most famous tax court cases to show how high a price you can pay for this crime.

The differences between avoiding taxes and evading taxes

There is always a clear line between the creativity in minimizing your taxes and breaking the law. Avoiding taxes is legal and understandable, but evading taxes comes with tough consequences. 

Tax avoidance means using legal accounting methods to lower the amount of taxes owed. For example, you can deposit your money into an Individual Savings Account (ISA) to avoid paying income tax on the interest you earn on your cash savings. You can also invest money into a pension scheme or claim capital allowances on things used for business purposes.

On the other hand, tax evasion occurs when a person or business uses illegal means to escape paying taxes. Some common examples of tax evasion include withholding from the IRS the tax you owe, keeping your business off the books by doing transactions in cash with no receipts, or using an offshore bank account to hide money, stocks, or other assets. 

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Most famous tax court cases in IRS history

Al Capone

Al Capone’s case is possibly the most famous one in IRS history. Though this notorious gangster had committed various illegal acts, including bootlegging, prostitution, and murder, only one landed him in prison––income tax evasion.

Under Capone’s leadership at the Chicago Outfit, the organization generated an estimated $100 million annual income. He was convicted on five counts of tax evasion from 1925 to 1927 and willful failure to file for 1928-1929. He was sentenced to 11 years in Federal Prison (including the notorious Alcatraz) and paid $80,000 in fines and outstanding tax bills.

Joe Francis

Joe Francis is a talented American entrepreneur, film producer, founder, and creator of Girls Gone Wild’s entertainment brand. He was accused of criminal tax evasion in 2007 for allegedly filing fake business tax returns. Francis is accused of submitting fake company expenses totaling more than $20 million to avoid paying taxes. He was able to avoid the felony accusation by accepting a guilty plea.

However, he didn’t seem to have completely avoided his tax problems. The IRS issued Francis a $33.8 million tax lien in November 2009.

Walter Anderson

Anderson’s case was probably one of the most famous tax court cases in IRS history. Walter Anderson, a former telecommunications executive, was accused of using aliases, offshore bank accounts, and shell businesses to conceal his earnings. Anderson pleaded a guilty plea in 2006, admitting to concealing nearly $365 million in earnings. He was condemned to nine years in prison and ordered to pay $200 million in compensation.

Anderson avoided the majority of the taxes owed due to a typo mistake in the amount of the federal government’s judgment. In this case, the IRS agreed to pay taxes and penalties for three years. Anderson is, however, still liable for $23 million owing to the District of Columbia government. 

Wesley Snipes

Wesley Snipes, the famous American actor, film producer, and martial artist, has been charged with numerous offenses by federal prosecutors. 

The “Blade” star is accused of hiding money in overseas accounts and failing to file federal tax returns for years. Snipes’ federal tax debt is reported to be approximately $12 million.

He was only convicted of misdemeanor charges in 2008 after being acquitted on felony tax fraud and conspiracy charges. 

Douglas P. Rosile, his accountant, and tax protester Eddie Ray Kahn were also accused as co-defendants. Rosile received a four-and-a-half-year sentence, and Kahn was given a ten-year sentence. 

Leona Roberts Helmsley

Leona Roberts Helmsley, an American businesswoman has accumulated a multi-billion dollar real estate portfolio. The “Queen of Mean” and her husband, Harry, were charged with invoicing millions of dollars in personal expenses as their business in order to evade taxes. Helmsley was convicted of three counts of tax evasion in 1989. She was sentenced to 18 months in federal prison. A fun fact was that she was sentenced to prison on the income tax deadline day for that year, April 15, 1992.

The bottom line

Evading taxes can lead to serious consequences. As you can see from the US’ top tax court cases listed above, it’s critical to understand what happens if you cross the line between legal tax avoidance techniques and unlawful tax evasion. If you have tax questions or have received a notice from the IRS, it’s a good idea to consult with a tax professional to discuss your situation and your choices moving forward.

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What Are Pass-Through Entities and Sole Proprietorships?

Pass-through entities and sole proprietorships are considered the dominant business structure in the US, but what do these terms really mean? How do they pay taxes to the US government? 

This blog will walk you through the pass-through structure and taxation, from the definition, types, and pros and cons of this business structure. 

What are pass-through entities and sole proprietorships?

A pass-through entity is a corporate structure in which taxation on the business income is immediately passed on to the shareholders to prevent duplicate taxation. Organization owners and shareholders under this model are taxed on the individual income earned by the company and do not have to pay extra company tax for managing the company.

Pass-through entities file more tax returns and report more business income than C corporations. Pass-through entities are not subject to corporate income tax and instead report their income on their owners’ individual tax returns.

Sole proprietorships, partnerships, limited liability companies (LLCs), and S-corporations are the most typical examples of pass-through entities. We’ll go over each of them in more detail below.

Types of pass-through entities

The most excellent part about operating a pass-through organization is that business owners have many alternatives. Here are the four different types of pass-through entities to help you better understand why you should or shouldn’t use each one.

Sole proprietorships

Sole proprietorships are the most popular type of pass-through entity, as they are the default choice for most independent contractors or freelancers. This type of business is typically easy to establish. However, sole proprietors have limited economic and accounting safeguards.

This form of pass-through entity is appropriate if you are a new business owner who is just starting up on your own. You can convert to a different model when hiring people or collaborating with other persons and groups.

Sole proprietors use Schedule C to report their business’s income or loss and determine their taxation. 

Partnerships

This type of pass-through entity is commonly used to incorporate larger micro-businesses than sole proprietorships. Partnerships are controlled by two or more people and require formal incorporation and ownership rights percentages. 

You can consider electing your business as a partnership if your company has numerous owners but isn’t large enough to be a corporation.

Limited Liability Companies (LLCs)

There are two kinds of limited liability companies (LLCs): Single-Member LLCs and Multi-Member LLCs. 

Single-Member LLCs pay their taxes in the same way as sole proprietorships, whereas Multi-Member LLCs pa in the same way as partnerships. Owners of Single-Member LLCs file their income taxes with Schedule C, Schedule E, and Schedule F, whereas associates in Multi-Member LLCs file Schedule K-1, which reflects their share of corporate profits on Form 1065.

S corporations

S corporations file their company taxes on Form 1120-S, but their revenue is immediately passed to the stakeholders and investors, who report them on Schedule E

Owners must pay “appropriate compensation,” taxed under the Federal Insurance Contributions Act but are not obligated to pay SECA tax on their profits (FICA)

Advantages and disadvantages of pass-through entities

It is advisable to investigate the benefits and drawbacks of pass-through entities to understand before electing your business as a pass-through entity.

Advantages of pass-through entities

  • Tax breaks: Pass-through entities help enterprises minimize multiple taxes by classifying net profit as individual income.
  • Simple set-up process: Several pass-through entities (including sole proprietorships and partnerships) have very few service charges and registrations, making them very simple to set up.
  • Equitable tax structure: By categorizing corporate income as personal income, owners in higher tax brackets will shoulder a more significant percentage of the tax burden.
  • Deductible losses: Owners of a pass-through organization can claim losses sustained by their firm to decrease their personal taxable income.

Disadvantages of pass-through entities

  • Stock restrictions: S-corps are the only kind of pass-through corporation that can issue stock. They are restricted to 100 investors and one form of stock, which may make raising funds from investors more challenging.
  • Fringe benefits tax: Fringe benefits (such as health insurance, stock options, and vehicles) are income for C-corps but not employees. Pass-through entities are not eligible for this benefit. However, there are limited exceptions for medical insurance. Therefore fringe benefits may be taxed.
  • Income tax on unreceived income: Even if the money stays in the bank account, shareholders of pass-through organizations must pay tax on business revenue (instead of being distributed to the owners).

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Top 3 Lessons Learned for Filing Business Taxes in 2022

If you’ve submitted your business tax returns before April 15, congratulations! You’ve successfully passed 2022’s tax season! On the other hand, if you’re still struggling with your financial records and IRS forms, no worries, we’re here to help! This article reveals the top 3 lessons learned for filing your business taxes in 2022. 

Update yourself on tax law changes

The first and foremost thing to remember when filing your business taxes is to educate yourself on the areas of taxation that affect you and keep yourself updated on tax rules and developments. It’s always a wise option to keep track of the current news because things change annually.

The changes listed below are in effect starting in 2022, so be aware of what they entail for your small business when submitting.

Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) is a financial incentive for employers who suffered lower revenues or business disruptions due to government-imposed limitations in 2020 and 2021. Businesses and certain non-profit organizations that paid employees despite the COVID-19 pandemic’s obstacles are also eligible for the ERTC, and many beneficiaries are receiving cash refunds. 

Though ERTC expired at the end of 2021, you can still claim this tax credit in 2022. Business owners have three years after the program’s closure to review wages paid after March 12, 2020, to see if they are eligible. The requirements to claim ERTC are the following: 

  • Your business recovered from a significant reduction in gross receipts
  • You haven’t claimed this credit before. 

Excess business-loss limitation

Businesses could transfer net cash outflows backward five years or forward forever in 2019 and 2020 thanks to a suspension of Tax Cuts and Jobs Act provisions. Nevertheless, those rules have been reinstated for the 2021 tax period.

This means that taxpayers cannot claim losses totaling more than $524,000 (for couples filing separately) or $262,000 (for the unmarried). This relates to business earnings and liabilities, notably Schedule C and revenue and shortfalls from pass-through entities.

Furthermore, they cannot use W-2 wages to cover business losses. Husband and wife taxes are paid separately and may result in a tax obligation even if lost income exceeds spousal earnings.

Interest expense limitation

Another tax law suspended to assist Americans during the pandemic is the accrued interest restriction rule, which will be reinstated for the 2021 tax year. This regulation restricts taxable income to the current tax year and cuts the financing costs deduction from 50% to 30% of modified tax liability.

Set up a checklist for filing your business taxes

When you run your own business, you’ll be accountable for keeping track of various critical records and tasks. It’s a good idea to establish a checklist to collect all the data you have to monitor year-round. This checklist helps you identify and collect your important documents (such as the home office or travel expenses) and keep them for tax preparation. 

Your tax status will probably be similar year to year. Even if your tax situation changes, you can still use the discipline you set in place during the year to expand on in the future. A little effort in planning and staying organized can go a long way.

File your taxes as soon as possible

It might be a good idea to schedule and have all of your papers in one place to assist you in filing early and receiving your tax refund quickly. If you are getting a refund, the earlier you file your form, the faster you will receive your refund—which means more cash on hand during this difficult time.

The sooner you file your taxes, the more time you’ll have to correct any bookkeeping problems or locate lost invoices, documents, or invoices. This additional time can go a fair distance toward reducing stress throughout what can be a stressful time of year.

Additionally, filing your taxes as soon as possible might help you overcome your financial flow. It’s critical to keep track of your 2022 quarterly tax estimate requirements since they may be changing continuously. 

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The bottom line

When filing your business taxes, remember to use Shoeboxed to save you time and hustle!

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!