On the day that Americans must file federal income tax forms, five alleged tax cheats were indicted for hiding money overseas to avoid federal income taxes, while two more individuals plead guilty to charges that they had tried to evade millions in tax by depositing their wealth in secret Swiss bank accounts.
At the same time, Bradley Birkenfeld, a former cheat-turned-whistleblower asked President Obama to commute his 40-month prison sentence. He and the National Whistleblower Center claim that the just-released indictments, as well as a massive settlement with Swiss banking giant UBS, would never have been possible without his cooperation.
The indictments are a coup for the Internal Revenue Service, which attempts to ramp up enforcement in the days preceding the national tax deadline as a reminder that complying with U.S. tax laws is only "voluntary" if you don't mind prosecution.
These cases, in particular, underscore how serious the consequences of cheating can become. Both of the two individuals who plead guilty face sentencing on five counts of criminal tax fraud. Each count comes with maximum prison sentence of 3 years -- leaving these two individuals with the potential of spending the next 15 years of their lives behind bars. In addition, each voluntarily agreed to pay civil penalties amounting to one half of the highest value of their UBS bank accounts during the years they failed to claim the income from this money on U.S. tax returns.
It is not illegal to hold money in foreign bank accounts. It is only illegal to fail to report the existence of the money and investment income on U.S. tax returns. Had they been forthright with the government, these individuals would have been paying tax on the investment income from these accounts, rather than giving up half of their value in one fine.
The severity of the penalties underscores the importance that that government places on prosecuting big-time tax cheats, who are believed to undermine confidence in the system by flaunting the law. Hiding income -- even income gained from illegal sources -- is among the 5 biggest mistakes a taxpayer can make when filing a return.
Even if you don't have all the money to pay taxes on the income you've earned, the smartest way to handle your return is to file accurately. Failing to file a return comes with a severe penalty that can boost your total obligation to the government by more than 25%, plus interest. Failing to pay on time generates a far less significant penalty of one-half of one percent per month, or roughly 6% per year. Meanwhile, significantly understating your income can generate penalties of as much as 75% of the tax due.
It's always tempting to cheat. But don't. If you get caught, the penalties are far more severe than the economic benefit you would have received from cheating.
If you need more time to file, you can get an automatic extension by filling out form 4868.
If you need forms, go to irs.gov, where you can download forms directly from the government's web site. (The left-hand side of the page has links to the most popular forms, including the 1040 and the Schedule A for itemized deductions.)