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How is Money Laundering Used for Tax Fraud?

Offshore Account Update

Posted in on July 30, 2018

Tax fraud takes many different forms, but the main goal of tax fraud is to dishonestly avoid paying the taxes that are due.

Tax Fraud vs. Tax Avoidance

Tax fraud is not the same thing as tax avoidance. There are legal ways to reduce the amount of taxes that must be paid or even, in some circumstances, to avoid paying taxes altogether. For example, many businesses are able to establish headquarters in foreign jurisdictions with low taxes and avoid U.S. taxes on some of their profits – and this can be perfectly legal. However, if individuals open secret offshore accounts to hide money they don't report to the IRS, this is not legal and could be considered a form of tax fraud that results in civil and criminal consequences.

A Maryland criminal tax lawyer can provide assistance in helping taxpayers to determine if their behavior falls within an official legal definition of tax fraud. Generally, however, if you are making material misstatements to the IRS in order to reduce or avoid taxes you must pay, you may be committing tax fraud.

Money Laundering

Money laundering, on the other hand, is something very different. Money laundering involves taking unlawfully obtained money and trying to turn it into money you have a legitimate explanation for.

For example, if you earn money from selling drugs, it would be difficult to deposit or spend that money without drawing unwanted attention. Authorities would want to know where it came from, and money laundering involves making up a history for the money that makes it look as though it was lawfully earned even when it wasn't.  If you start a business and pretend you earned money from that business when really the money comes from the drug trade, this is an example of money laundering.

Money laundering has a specific legal definition, and you can be convicted of money laundering only if your money comes from certain kinds of unlawful activities. These are called “specified unlawful activities,” and they include things like bank fraud and wire fraud and drug crimes. Tax fraud, however, isn't a specified unlawful activity under money fraud laws so the two crimes are very different.

There are circumstances where you might earn income from unlawful activities and will both launder the money and lie to the IRS about it. In those circumstances, it is possible that you could be charged with separate offenses for money laundering and for tax fraud.

There may also be situations where you earn money from illegal activities, prosecutors can't necessarily  prove that you got your money from unlawful actions, but there's evidence you didn't declare all your income. You could be charged with a tax crime in these circumstances. One of the most famous examples of this is when Al Capone, a notorious gangster, was convicted of tax evasion.

If you are accused of either money laundering or tax fraud, it's important that you get legal help. A Maryland criminal tax lawyer like Kevin Thorn can provide you with representation if you are under investigation by the IRS or if you are facing charges. Contact us today. We are available online or via phone by calling (240) 235-5096.


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