During the Regan administration, certain incidents raised questions that had overtones of the Watergate Scandal, involving “what did the President know and when did he know it?” Certain members of the administration noted that the president was not informed of some operations as a means of providing him “plausible deniability.” This was employed to prevent a reoccurrence of the Watergate issues that took down the Nixon presidency.
Some individuals may be tempted to use this strategy when dealing with tax matters. If you make decisions on how to proceed with tax planning or business decisions that have tax implications, you may know that for the Internal Revenue Service, there is a significant distinction between non-willful and willful noncompliance. Relying on plausible deniability is risky and could result in a finding of willfulness.
Willful noncompliance begins a parade of horribles that can lead to your later being subject to the delinquent tax, interest, and penalties that are often as high as 25 percent. These matters could develop into a criminal prosecution, where the penalties could reach 75 percent.
While you may believe that “willfulness” implies that a transaction would need to be found to be designed primarily to avoid taxes, the actual definition is much broader. It may be a pattern and practice of moving money through multiple bank accounts. It may be found in your failure to learn what the reporting requirements are or the selective filing of some tax returns.
Complex business and trust structures could give rise to a perception of willfulness, as could the use of cash in situations that suggests you are potentially trying to avoid taxes by use of “petty cash.” During a tax audit, you may be able to demonstrate non-willfulness by showing that mistakes were indeed mistakes and you had followed professional advice from accountants or tax lawyers.
Because of the inherent complexity of most tax matters, you should always seek advice from professionals, who can help with your navigation of those complexities and provide multiple levels of support should you be subjected to a tax audit.