By Robert Wood
As Spain's high-stakes criminal tax trial of Lionel Messi and his father continues, one of Messi's defenses is that he didn't read the documents. With over $70 million in annual income, Messi is #4 of top earning athletes according to Forbes. Yet, he and his father Jorge Horacio Messi could still face jail. Messi's claims that he never looks at the contracts he signs may ring true, but is that enough? That defense usually isn't enough with the IRS, even in court.
Messi and his father are accused of using offshore shell companies to avoid taxes on 4.16 million euros ($4.7 million) of Messi's income. It did not help that Messi's name came up again in the Panama Papers. Plus, the 'I didn't know' defense can be a tough sell. Most people–even U.S. lawmakers–do not prepare their own tax returns. The client should review the return, and the return preparer should ask the client to verify that all figures are correct, that the correct boxes are checked, and so on.
You must sign under penalties of perjury, and you clearly should review the return before you sign. But some taxpayers read almost nothing. Electronic filing has arguably made the problem worse. There's a marked contrast between the mechanics of paper vs. electronic. The taxpayer with traditional paper filing at least must sign the return before mailing, and that imports a certain amount of due diligence.
With e-filing, there is no signature in the traditional sense, for taxpayer or preparer. The taxpayer must sign a signature authorization form (Form 8879) that recites that the taxpayer has reviewed the electronic return, it is accurate, etc. But shortly before filing, changes may be made, and the authorization form may be signed days before. The final return may be significantly different from what the client saw.
Even if is true, the "I didn't read it" defense often does not work. Courts have consistently ruled that taxpayers have a duty to read their returns. As early as 1928, courts have held that the taxpayer still has a duty to read the return and make sure all income is included. See Mackay v. Commissioner, 11 B.T.A. 569 (1928). Saying you relied on your tax adviser often fails too. Reliance on a tax preparer is not a defense to penalties if your cursory review of the return would have revealed errors. See Metra Chem Corp. v. Commissioner, 88 T.C. 654 (1987).
One of Messi's biggest problems is secrecy, and that may be hard to mesh with claims that he did not know what was going on. For a famous person, of course, secrecy may not primarily be about taxes. In some cases it may not be about taxes at all. But still, as the Panama Papers have shown, secrecy in any context is viewed with increasing suspicion. Robo-signing may be too. It was used as a defense during the bank foreclosure crisis, and not always successfully. And it is even less likely to work with tax returns.
This article originally appeared at Forbes.com.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
I’m a tax lawyer based in San Francisco (www.WoodLLP.com), but I handle tax matters everywhere. I enjoy untangling a tax mess from the past, disputing taxes with the government or planning taxes for the future. One of my specialties is advising about lawsuit payments. Whether you’re receiving or paying a legal settlement, you can probably improve your tax position. I write frequently about taxes, from expatriation to sales tax, from selling your company to restitution. I’ve written over 30 tax books, but my best seller is still Taxation of Damage Awards and Settlement Payments. Contact me at wood@WoodLLP.com.
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