Sunday, February 03, 2008

The High Cost of Not Paying Taxes

As many news outlets have reported (see a helpful list here), the actor Wesley Snipes was convicted last week on three misdemeanor counts and acquitted on three other misdemeanor counts as well as two felony counts in connection with non-payment of taxes -- evasion which grew from his involvement with a group that claims that people are not required to pay taxes.

I wish that I could say that I had predicted the generous baby-splitting in which the jury apparently engaged, but as I argued during a short appearance on CNBC when the trial was beginning (video here), this case looked pretty grim for Snipes. I allowed, of course, that a jury can always buy into a bad argument; and I also pointed out that being an actor had to be a bonus for Snipes as he tried to convince the jury of his sincerity (to say nothing of the benefits of being a celebrity in our tabloid-driven culture).

Still, the outcome must count as a surprise, because the case against Snipes was very strong. Given that his only defense was to claim that he sincerely believed that he did not have to pay taxes, most observers thought that Snipes would have a very difficult time explaining why, among other things, he sent the IRS fake checks in payment of his taxes.

Moreover, as a matter of trial strategy, Snipes's two co-defendants (who had sold him on the idea that taxes are voluntary) would simultaneously be trying to convince the jury that they sincerely believed that their tax theories were not crazy. Given that Snipes's own lawyers referred to those theories as “kooky,” “crazy” and “dead wrong,” Snipes would be left trying to say that he had been convinced of these nutty theories by two men who would argue to the jury that they were deluded enough to believe their own rantings. Snipes thus would need to pull off a neat trick: getting the jury to believe that he sincerely believed two men who were demonstrably unhinged from reality.

As it turned out, the jury did not hear from one of the defendants (who refused to recognize the authority of the court), and Snipes's attorneys rested without calling any witnesses as part of a minimalist approach. Even so, the jury was extremely generous to Snipes, given the evidence against him.

For Snipes as an individual, of course, the split decision has to be viewed as a huge victory. His potential jail time has now dropped from 16 years to 3, and it is imaginable -- though unlikely, given the sentencing guidelines and this being such a high-profile case -- that he will do no time at all. He can also continue to say that he is not a felon, which is worth quite a bit.

While this verdict is a personal win for Snipes, though, is it "a huge victory for the tax protester movement," as the TaxProf blog put it? I have little doubt that many tax protesters are celebrating, which means that TaxProf probably has accurately characterized the views within the movement itself. I would argue, however, that such a view is -- like so much else in the tax protesters' playbook -- a serious distortion of reality.

The Snipes trial was never about whether he had to pay taxes. (If it were, after all, his lawyers would have committed malpractice by arguing that their client's reasons for not paying taxes were insane.) The question for the jury was entirely about whether he would do jail time, not whether he had any tax liability. Snipes will now have to pay those taxes as well as interest and penalties; and the jury's verdict in a criminal trial is totally irrelevant to that simple fact of civil tax law.

Therefore, we might take a moment here to consider what Snipes lost by denying that he had to pay taxes. I have not seen any reports of his ultimate tax liability, but reports do indicate that he did not pay tax on $38 million in income over a number of years. As a rough guess, he might have owed about $14 million in taxes on those earnings. If so, he now must pay that $14 million in back taxes, plus interest charges (which are not punitive but merely prevent taxpayers from making a profit by taking frivolous tax positions and then putting their unpaid tax liabilities in interest-bearing accounts while the process plays out). In addition, Snipes will face penalties ranging from 20% of the unpaid taxes (if his lawyers are able to convince the IRS that Snipes's underpayments were due to "negligence," which is a huge stretch) to 75% if the underpayment is due to fraud (as seems clear). "Failure to file" also carries separate penalties that could run as high as 100% of the tax due.

As in all such instances, we cannot know the precise outcome without further information; but it at least seems plausible that Snipes will be required to pay another $10 million or more. His attorneys' fees surely added up to millions of dollars as well. Finally, he is now a convicted criminal, which is not only a blot on his record but can cause problems in a variety of circumstances (such as foreign travel, which is particularly important to a movie actor).

In short, even if Snipes manages to avoid jail time (which I hope he won't), the price he will pay is steep. In an attempt to evade $14 million in taxes, Snipes must now pay that amount in full plus interest plus penalties probably exceeding $10 million, plus legal fees, all while now carrying a criminal record. Add in the years of uncertainty that this prosecution caused Snipes, as well as the personal toll of a trial carrying the possibility of 16 years in prison, and this does not look like an advertisement for getting into the tax denial game.

Everyone is free to engage in their own cost/benefit analyses, of course, but how would anyone conclude that going down this road was a winning proposition?

Posted by Neil H. Buchanan