As described in a recent Department of Justice press release, failure to include dividends in gross income can have serious adverse consequences for the taxpayer.
According to the press release, the taxpayer owned 50 percent of a business that sold internet access to members of the Armed Forces and civilian contractors stationed on Kandahar Airfield in Afghanistan. The taxpayer also owned 50 percent of another business that sold internet access to members of the Armed Forces stationed at Guantanamo Bay in Cuba. In 2013, these two businesses began paying significant dividends to the taxpayer. What did the taxpayer do? The taxpayer stopped filing federal income tax returns. Three years later, the taxpayer filed a false affidavit with the U.S. Citizenship and Immigration Service, attaching unfiled copies of federal income tax returns and falsely attesting they were filed.
In 2019, the taxpayer received letters from the IRS on account of the unfiled returns. The taxpayer hired a tax attorney and tax return preparers and falsely told them that the dividends he had received between 2013 and 2018, amounting to more than $3.8 million, were nontaxable loans. He told the professionals he had retained that he did not know the other shareholders of the businesses, which was untrue. Relying on this false information, the tax professional prepared income tax returns that underreported income and tax liability. The taxpayer filed those returns. As a result, the taxpayer failed to report about $4,620,000 in come and underreported tax liability of roughly $1,570,000.
The taxpayer was indicted and pleaded guilty to one count of tax evasion. The taxpayer faces up to five years of imprisonment, supervised release, restitution, and monetary penalties.
Though tax law is complicated, some aspects are rather simple. Wages are gross income. Interest is gross income. Dividends are gross income. Though business arrangements can be complex, some transactions are simple. Dividends are a distribution of corporate income. They are not loans. They are not distributed to shareholders with an accompanying promise to repay after a set period of time while incurring interest obligations on the recipient.
The motivations for tax fraud can be both easy and difficult to understand. A person who is barely making ends meet and who received a small amount of additional gross income that generates additional tax liability that reduces the net amount received to something even smaller may be tempted to find a way to avoid those taxes because there are children to feed and rent to pay. But a person who receives millions of dollars of income but who chooses to commit fraud to avoid paying taxes is operating on a different level. Even after paying the taxes, that person puts millions into their bank and investment accounts. Yes, it is possible that the person receiving millions of dollars of income has millions of dollars of debt to repay, though almost always that debt arises from bad decision making and ought not become a burden imposed on taxpayers who are paying their tax liabilities.
