Individuals can be, and are, charged criminally by the federal government for tax offenses. Convictions can result in substantial jail time, hefty fines, and a court order to pay unpaid taxes to the United States Treasury. In addition, the state of Maryland also can, and does, prosecute individuals for tax crimes.
Imagine you own and operate a liquor store in your neighborhood. You report the business as a sole proprietorship on your individual income tax return. Many customers pay using credit cards; however, some pay with cash. In order to reduce your gross receipts and the taxes due, you fail to deposit all of the cash in your business bank account and you fail to tell your tax return preparer about it. This could result in consequences you never considered. In addition to potential federal charges, the failure to report all of the cash receipts of your liquor business could result in you being investigated and charged with filing false state income tax returns, filing false sales and use tax returns, and perjury, amongst other crimes (i). This is all in addition to federal violations you could be charged with. If convicted of state charges, you could face up to 10 years in prison.
Or, imagine you run a construction business. While your business has been improving, you find it difficult to pay employer withholding taxes and other day-to-day operational expenses. Therefore, you pay some employees in cash and you simply omit others from your payroll records. Failure to file income tax withholding returns, (2) failure to withhold Maryland income tax, and (3) failure to pay the withheld taxes over to Maryland are criminal offenses with substantial penalties (ii).
Other Maryland tax offenses include:
• Failure to file an individual income tax return (iii);
• Filing a false alcoholic beverage tax return (iv);
• Failure to file required sales and use tax returns (v);
• Making a false statement if a sales and use tax return contains false information or omits materially false information (vi);
• Failure to collect or pay over sales and use tax (vii); and
• Failure to maintain sales and use tax records (viii).
Aside from criminal penalties, other dire consequences may result from a criminal conviction. Both liquor licenses and construction licenses may be revoked by the state. Those who are licensed in Maryland for a variety of other occupations (lawyers, doctors, real estate agents and appraisers, architects, professional engineers, tax preparers, home improvement professionals, etc.) could similarly face actions to revoke their license, which would have a profound effect on their ability to earn a living. The state or federal government could also take action to hold you personally liable for the unpaid employment taxes and/or sales and use taxes. And the state or the federal government will seek to collect any outstanding taxes, interest, and penalties due. As potential penalties and interest often exceed the taxes due, this can cause severe financial hardship on a business or individual. In addition, the mere existence of a conviction, even a misdemeanor, could affect your ability to obtain a job in the future. A felony conviction could make you ineligible to vote.
Aside from taxpayers, those who prepare income tax returns for others should be aware that they could face Maryland tax charges if they willfully (1) prepare false tax returns, (2) help to prepare false tax returns, (3) cause false tax returns to be prepared, or (4) cause false claims for tax refunds to be made (ix). To be convicted, the state must prove that the preparer did so with fraudulent intent or the intent to evade tax. Evidence of fraudulent intent would include knowledge that deductions taken were false, or that income was not fully reported.
In all of these instances, in order to obtain a conviction the state must prove that the defendant acted willfully. Willfulness can be established only if the state introduces evidence of an intentional violation of a known legal duty. This is the same intent standard required for proof of federal tax crimes, and it is a high burden on the government. In essence, the state must demonstrate that the defendant knew they were violating the law by not filing income tax returns or filing false tax returns, and did so anyway. Evidence that might prove the defendant’s willful intent could include a pattern of conduct over many years and many returns, creating false records, keeping a double set of books, and lying to investigators.
With significant cuts to the Internal Revenue Service budget over the past few years, the number of criminal tax cases investigated and prosecuted criminally at the federal level may fall. As a result, Maryland may begin to more aggressively pursue tax crimes. Attorneys in the Tax Controversy Group at Rosenberg Martin Greenberg, LLP have the background and resources to assist taxpayers in these types of cases. For an initial consultation about your situation, contact Leigh Kessler at 410.649.4991 firstname.lastname@example.org.
i Md. Code Ann. Tax-Gen. §§ 13-1002(b), 13-1003(c)
ii Md. Code Ann. Tax-Gen. § 13-1007(a)-(c)
iii Md. Code Ann. Tax-Gen. § 13-1001(d)
iv Md. Code Ann. Tax-Gen. § 13-1002(a)
v Md. Code Ann. Tax-Gen. § 13-1001(e)
vi Md. Code Ann. Tax-Gen. § 13-1003(c)
vii Md. Code Ann. Tax-Gen. § 13-1006
viii Md. Code Ann. Tax-Gen. § 13-1008(c)
ix Md. Code Ann. Tax-Gen. § 13-1004