What happens when you understate the income on your tax return by over a million dollars? Nothing good.
Previously we discussed how game show winnings over $600 are taxable income. These winnings go directly on your tax return and, depending on your individual tax situation, you may end up owing money to the IRS. It’s the reason I always recommend you seek the advice of a tax professional if you find yourself on the receiving end of a big chunk of change from your handsome win.
Richard Hatch, Survivor’s very first winner, found out the hard way that failing to report a cash prize that literally the entire nation knew about would result in criminal prosecution. Here’s how it went down. For the years in question, Hatch won the one million dollar grand prize for become the nation’s first Survivor champ. In addition, he won a new car and earned a few hundred thousand through radio appearances. None of those items made it on to Hatch’s return.
You might initially think to blame his accountants for putting him in this situation. I mean, he had money. Why couldn’t he hire a halfway decent accounting team? Not so fast. The accountants he hired tried to help him: they actually prepared versions of the tax returns reporting all of that income, but Hatch opted not to file them. Instead, he filed informational returns that omitted the income.
The rest is history: The IRS assessed a tax of almost five hundred thousand dollars, referred the matter to the Department of Justice and Hatch was eventually indicted, tried, and sentenced to fifty-one months in prison for evasion.
The reality here is you don’t need to win big to land in evasion territory. As referenced in my piece about the reporting of digital asset sales and ownership, the mere omission of the sale or ownership of an asset in an attempt to evade or defeat the assessment or payment of a tax – value notwithstanding- may be grounds for referral to the Department of Justice.
So, the voluntary reporting of income on a tax return keeps the matter about the money, and not about your livelihood. Let’s not confuse the issue here. Hatch wasn’t convicted for not paying his taxes; he was convicted for filing a false return. Hatch almost certainly would have remained a free man if he included the income on his return even if he couldn’t pay it immediately, provided he arranged to pay the tax debt (albeit with steep penalty and interest).
Why do I think that? Go the IRS’ website and read the first line you see in the middle of the page. The stated mission of the IRS is to help people “understand and meet their tax responsibilities”. Indeed, even the Special Agent in Charge of the Internal Revenue Service, Criminal Investigation in New England, Douglas A. Bricker, echoed this same message in regards to Hatch’s sentence, stating, “It is important for those of us who pay our taxes to know there are consequences when greed and arrogance interfere with obeying the law.”
Accordingly, it’s a good reminder that the IRS is in the business of making sure you follow the rules. And the two big ones are [1] timely filing an accurate tax return, and [2] making every effort to chip away at the bill. The IRS, much like the millions of Americans who watched the season finale of Survivor, knew Hatch won the money. The TV network told the IRS so. The IRS merely wanted to make sure Hatch would follow these rules. And when he didn’t, the government came down with the hammer.
As a Matter of Tax 