Money Laundering & Tax Evasion Intersect for Criminal Tax Violations

Money Laundering & Tax Evasion Intersect for Criminal Tax Violations

Money Laundering & Tax Evasion Intersect for Criminal Tax Violations

How Money Laundering & Tax Evasion Intersect for Criminal Tax: Two of the most common types of crimes that may result in financial criminal prosecution involve Money Laundering and Tax Evasion. While Tax Evasion is one of the most common types of criminal violations of the Tax Code, money laundering can also lead to a criminal tax violation — whether directly or indirectly. Money Laundering is a crime in which a person takes money that is unclean (such as from drug sales) and then cleans the money by running it through a legitimate business such as a restaurant — as a conduit to generate clean money (from a legal perspective the money is not really clean). Tax Evasion under 26 USC 7201 is when a Taxpayer makes an affirmative act to evade taxes such as filing a false tax return or evading the payment of tax. It is not uncommon for money laundering to lead to tax evasion. It is important to note that illegal sourced money is disqualified from the IRS Voluntary Disclosure Program. Let’s take a look at the basics of how money laundering intersects with tax evasion from a criminal tax perspective.

18 USC 1956

The crime of money laundering falls under title 18 of the United states Code (Crimes and Criminal Procedure):

Laundering of Monetary Instruments

      • (a)(1)Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity—

        • (A)

          • (i) with the intent to promote the carrying on of specified unlawful activity; or

          • (ii) with intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986; or

        • (B) knowing that the transaction is designed in whole or in part—

          • (i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or

          • (ii) to avoid a transaction reporting requirement under State or Federal law, shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.

          • For purposes of this paragraph, a financial transaction shall be considered to be one involving the proceeds of specified unlawful activity if it is part of a set of parallel or dependent transactions, any one of which involves the proceeds of specified unlawful activity, and all of which are part of a single plan or arrangement.

What does this Mean?

When a person intends on engaging in a financial transaction with the idea of using a legitimate business to clean dirty money, it is referred to as money laundering. In fact, written into the definition of this statute is reference to the tax evasion statute under 7201.

26 USC 7201

Title 26 refers to the Internal Revenue Code and statute 7201 refers to evasion:

      • Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

Example of Money Laundering and Tax Evasion Intersection

Here is an example of how money laundering leads to tax evasion: Mike generates a significant amount of money from illegal gambling. Mike cannot just take $1,000,000 worth of cash over to the bank to try to deposit it without being questioned about where the money came from. Therefore, Mike invests the illegal money into a legal restaurant business in exchange for a 25% stake in the proceeds. The following month, Michael receives $20,000 which represents 25% of his share in the business.

Legally, even though the illegal money has been cleaned does not mean Michael has cleansed himself of the crime. There are actually two crimes (if not more). From a money laundering standpoint, Michael received money that was illegal and then used a legitimate conduit (restaurant) to try and launder the money and avoid detection by the US government and evade taxes on the ill-gotten gain — this would amount to money laundering.

In addition, Michael received $1,000,000 of ill-gotten gains that he did not report as income. The mere fact that Michael cleansed the money and is now receiving his share of the proceeds from a legitimate restaurant and reporting it as income does not negate the fact that he had received $1,000,000 in ill-gotten gains.

When Michael filed his tax return, he did not report the $1,000,000 in ill-gotten gains — but only reported his share of proceeds from the restaurant.  The failure to report the $1,000,000 as income is tax evasion since he willfully committed the act of filing a knowingly incorrect tax return that intentionally excluded his ill gotten gains (ill-gotten gains are taxable). Therefore, Michael can be guilty of both money laundering and tax evasion. 

And, if the laundering and/or evasion involves international tax and reporting issues, there can also lead to significant IRS penalties and a DOJ Investigation for noncompliance with reporting such as FBAR and FATCA, etc.

*If you believe you may be guilty of a tax crime, you should consider reaching out to a Board-Certified Tax Law Specialist to get a general understanding of what your options maybe to try to avoid or minimize criminal charges.

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