Working for Cash Could Get a Lot More Expensive

I realize my clients are adults and want to be treated as such, but I must discuss a subject sure to make some of you squeamish, undeclared income, also known as "working for cash," or "under the table."  I do so with some hesitation because I know my client base, primarily police officers and physicians, is far more honest than the public as a whole, but, as you will see, this is precisely why I am most concerned.

To most citizens, including most tax professionals, the IRS is a mysterious and alien force to be feared. I attend seminars and classes with enrolled agents and accountants and regular tax preparers, learning about various issues in tax law. Many of these seminars are even conducted by the IRS. But there is a place where I go they do not, the area of criminal tax fraud.

Close interaction with IRS and Justice Department prosecutors is an integral part of continuing education of the Tax Section of the California State Bar, of which I am an active member. As an attorney, I am able to communicate directly with the major decision makers in the IRS, including those working in law enforcement.

One such individual is Richard Speier, who commands all IRS Criminal Investigation Division (CID) personnel in the Pacific Region of the United States. He attends bar functions on a regular basis and is very accessible for questions and concerns. His recent discussion at one such bar meeting concerns issues all my clients should know.

Until now, the focus of IRS/CID has been on so-called "illegal source income." This means, for all intents and purposes, narcotics-related issues. Many of my police officer clients have had occasion to work with IRS/CID agents in these cases. Needless to say, this focus by the IRS has been of zero concern to my clients.

That focus, at the direction of the IRS Commissioner, has now changed. According to Mr. Speier, CID resources will be shifting to "legal source income," the world of working "under the table." Because the IRS is interested in fostering compliance among members of the public, they will specifically seek out "high profile/high publicity" cases. This is why my clients are far more at risk than most. The prosecution of a police officer or physician for tax evasion is exactly the kind of case which the IRS believes will "send a message" no one is above the law. In other words, an otherwise small case where the IRS would never make a criminal referral will become criminal simply because the target is a police officer or physician. As we all know, police and medical professionals are subject to double jeopardy when they become targets of a criminal investigation because their livelihood is placed at risk along with their freedom.

To achieve the desired results, the IRS has assigned a media relations representative to each CID office, in order to exploit the publicity the IRS will seek with the criminal cases they work. Civilian employees will be trained to evaluate fraud referrals for potential, then share that information with a special agent.

My point in discussing this is to emphasize my belief that you should not have any undeclared income. I believe every dime should be declared followed by the aggressive deduction of legitimate expenses to reduce that income. Once you have declared all your income, and then claim legitimate deductions, there can be no criminal liability. Any resulting dispute with the IRS is a civil matter only!

While the area is touched upon in some typical tax seminars, the advice given to the tax preparers present is rather straightforward. They are told to tell their clients, should the slightest possibility of criminal liability arise, "Go See a Lawyer!" The reason is simple. Only an attorney can discuss and evaluate criminal liability in a privileged conversation. Enrolled agents or accountants will be forced to testify against their clients by prosecutors.

Working on a "cash" basis is something widely accepted as legitimate by otherwise law-abiding citizens. They rationalize their failure to declare the income as the exercise of their right to avoid what is widely viewed as an abusive tax system.

I cannot emphasize enough how dangerous this attitude is. Even the most carefully hidden cash arrangement can be brought crashing into view by a disgruntled employee or spouse. Depositions involving income (for support) in family law matters have long been a fertile source of referrals to the IRS/CID.

Finally, let me assure I am convinced the promise of greater enforcement is real. Tax evasion is a crime, and the tools of the IRS/CID are familiar to my peace officer clients. Search warrants, grand juries and interrogations. I cannot emphasize enough the huge risk associated with undeclared income should it come to the attention of the IRS.

Do not take a chance with your career, your retirement and your family for the sake of avoiding a few dollars in taxes.