Al Capone, Income Tax Evasion, and YOU
By: Mark Stancato, CFP ®, EA, CRPS®
When the dust finally settled and the smoke cleared Al Capone pled guilty in Federal court on June 16th, 1931 for income tax evasion and prohibition charges. Al “Scarface” Capone was convicted on five counts of income tax evasion and was sentenced to eleven years in federal prison on October 17th, 1931. He was just 33. In addition to an eleven-year prison sentence, Capone was also fined $50,000 including $7,692 in court costs plus was required to pay $215,000 on back taxes with interest. Financial planner hat: “Let’s put those numbers into today’s context assuming a 3% annual inflation rate”:
That’s an IRS bill in today’s dollars of $3,899,622 plus an eleven-year stretch which included serving prison time in America’s toughest prison - Alcatraz. Yes, folks, it was stiffing the IRS that brought down one of history’s most infamous criminals. And not the estimated 300-700 people experts say Capone was either directly or indirectly involved in killing. Pretty powerful stuff!
So what’s the point? Well, as they say in Texas… “Don’t Mess With Texas” and the IRS too! I added that last bit. The Internal Revenue Service is tasked with the responsibility and oversight of collecting America’s revenue by enforcing tax laws and administering tax collection. The IRS has the legal authority and power to garnish wages, place liens on property, and levy (take away) property. And if you really like pushing the envelope, you can wind up in prison. Getting back to the point: Pay your taxes!
Here are some helpful tips and general rules of the road for staying tax compliant and in the good graces of this 159-year-old crime-fighting, penalty-wielding institution.
File your taxes in a timely manner – If not, the IRS charges a 5% penalty of the unpaid taxes for each month or part of a month the tax return is late up to a maximum of 25%.
Pay the entire amount – Sounds straightforward, however, ANY underpayment is charged a monthly rate of .5% (half of one percent) of the unpaid taxes for each month or part of the month the tax remains. The penalty maximum is 25%. This could quickly add up if after two years the IRS sends you a tax bill when it eventually realizes you didn’t include that AMT income. Double-check, please.
Keep accurate books and records - The IRS applies two common Accuracy-Related penalties to individuals. The first is the ‘Negligence or Disregard of the Rules and Regulations’ and the second is ‘Substantial Understatement of Income Tax’. The IRS requires that all taxpayers make a reasonable attempt to follow the tax laws when preparing their tax returns. The tax penalty for Negligence or a Disregard of the rules is 20% of the portion of the underpayment of tax.
The ‘Substantial Understatement of Income Tax’ is defined as an understatement of your tax liability by 10% of the tax required to be shown on your return or $5,000, whichever is greater. For example, if the tax truly owed after a proper tax return is complete equals $30,000 however the taxpayer finagled the numbers to bring the tax liability down to $20,000; it’s safe to say they have met the definition. In this example, the difference is $10,000 of reduced tax liability ($30,000 - $20,000). The $10,000 reduced liability is greater than the IRS stated “10%” of $30,000 which is $3,000. And it’s also greater than the flat $5,000.
What’s the penalty? Good question…answer: 20% of the portion of the tax underpayment that was understated on the return. Or, in this example, the IRS imposed penalty would be $2,000 (20% x $10,000). Ouch!
Pay your Estimated Tax Payments (on time) – Individuals, Sole Proprietors, partners, and S Corporation shareholders generally must make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. For C. Corps, the amount is $500 or more. Estimated tax payment dates are staggered through the year using the following schedule:
January 1 to March 31 – April 15
April 1 to May 31 – June 15
June 1 to August 31 - September 15
September 1 to December 31 – January 15 of the following year
As you can see from the schedule above; the payments don’t align with a traditional quarter. The second payment due is only two months after the first payment which is due on April 15th. You may think that the second payment should be due by July 15th however, it’s one month earlier and can sneak up fast. Go figure. Keep in mind that if you pay your “quarterly” payments outside of their respective windows, you could end up paying a late penalty. A common misconception is that a taxpayer can miss a couple of windows and true-up their estimated payments before year-end but, late penalties could still apply because the payments schedule was late. Underpaying your estimated taxes will apply if you don’t pay enough estimated tax on your income OR pay it late. And to add insult to injury, the penalty may still apply even if the IRS owes you a refund.
To avoid paying an Underpayment of the Estimated Tax penalty, the IRS has provided a Safe Harbor guide to keep you on the up and up. Safe Harbor guide:
Pay at least 90% of the tax shown on the return for the current taxable year OR 100% of the tax shown on the prior year. The Safe Harbor rule is slightly amended for high-income taxpayers. If the adjusted gross income on your previous year’s return is over $150,000 (over $75,000 -married filing separately), you must pay the LOWER of 90% of the tax shown on the current year’s return or 110% of the tax shown on the previous tax year.
So, there you have it. A few tips and guardrails to keep you tax compliant. Oh… whatever happened to Al Capone? On November 16th, 1939 Capone was released after having served seven years, six months, and fifteen days, AND paid all fines and back taxes. During his confinement, Capone’s health worsened and he never publicly returned to Chi-town. He moved to Palm Island, Florida with his wife and family where he eventually succumbed to a stroke and pneumonia and died on January 25th, 1947. He was 49.