Is the Government Using Jail to Scare Taxpayers?

February 18, 2014 | By: TaxCure Staff

tax prison timeOne of the realities of our tax system is that reporting is largely voluntary. You are required by law to pay taxes, but, for the most part, the system relies on the fact that you are honest in your reporting. You voluntarily report your income, and then pay that amount. You also send in your payment, preventing a situation in which the government goes door to door, figures your taxes for you, and then takes the money on the spot.

Due to the nature of our tax reporting system, there are attempts to illegally reduce what is owed (this is different from legally reducing your tax liability). The government generally ramps up some of its enforcement efforts during tax season and isn’t shy about publicizing cases of prosecution for tax evasion — and even pointing to those who have jail time.

In fact, there are some cases in which the government is aggressively going after those convicted of tax evasion and asking for jail sentences. However, according to Forbes, many of the richest are getting off without jail time, even though U.S. Sentencing Guidelines often require jail time for high-priced crimes like failure to pay taxes, and failure to disclose foreign accounts.

Two examples are billionaires H. Ty Warner (founder of Beanie Babies) and Igor Olenicoff (a real estate developer) who were required to pay huge fines and serve probations. Even with fines of tens of millions of dollars, both of these men are still worth more than a billion dollars — and the government thinks that they should go to jail on top of paying their fines.

Why the Government Pushes for Jail Time

The government often pushes for jail time, partly as a way to scare taxpayers. Billionaires can pay a relatively small portion of their net worth in back taxes and penalties, and go on living their lifestyles. What’s the incentive for the super-rich to pay what they owe in those cases? There is the risk of getting caught, but if they aren’t caught, they save a lot of money. If they are caught, they pay a fine that they can afford and go on as before.

Jail time would change that. There was a lot of hoopla around Wesley Snipes's jail sentence for his tax evasion. Many of the well-known celebrities jailed for failure to pay taxes are held up as examples of what not to do and serve as cautionary tales for the rest of us. While most “regular” taxpayers aren’t likely to be faced with jail time, the reality is that the prospect of losing freedom might be an incentive to report all of your income. High-profile tax evasion cases help the government since it means that you are more likely to be accurate on your tax return voluntarily.

With these billionaire cases, though, things are different. The government is pushing for jail time (and even appealing in the Warner case) because it wants to show real consequences. When judges decline to send billionaires to jail, the worry is that there is more work for the government as it devotes resources to tracking down unpaid tax bills. Perhaps, the thinking goes, if there was jail time for billionaires, there wouldn’t be as much tax avoidance and evasion.