Making Money and not filing an Income Tax Return I have a friend who works as a teacher. He claims that for several years he has made money and paid all the income tax that he owed and maybe a bit more. He has not filed an income tax return. I do not think this is wise. However, I believe he has not broken the law. Has he? I live in the United States. Note: I am talking about Federal Income Tax not state or local income tax.
It isn't &quot;illegal&quot; but there are negative consequences to doing so. The civil penalties for failure to file a tax return are a percentage of the tax not paid (5% per month up to a maximum amount, plus interest). There is a small penalty for not filing an information tax return (like a 1099) when you have to file one and don't owe money, but there is usually not such a nominal fine for a personal form 1040. The statute of limitation on IRS efforts to audit a tax return or to impose additional tax for additional amounts owed doesn't begin to run until a tax return is filed. Criminal penalties require an intent to deprive the government of money. If he had more withheld than he owed, he probably isn't subject to any realistic significant civil or criminal consequences, but it is highly risky if he actually owed more than was withheld from his paychecks, and it deprives him of an ability to get refunds if too much was withheld (and possibly also stimulus check refunds) after three years. The issue here is really that it is hard to see that the downsides of not filing a tax return are hard to match to the benefits of filing a tax return, which for a wage and salary earning teacher, are very slight (you could pay someone to do it for $100-$300). Also, the lack of tax returns could hurt the teacher if the teacher ever has to apply for credit or get divorced or file for financial aid for the teacher's own kids to go to college. Of course, if he had lots of unreported side income, upon which he has not paid taxes, then there are serious civil and criminal consequences.
That's the entire point of a summary proceeding. You're allegedly found committing an offence, that isn't worth the court's time to hear but nevertheless requires some penalty. The only way to "unambiguously deny liability" is by requesting a hearing and denying liability in the notice of this. The court doesn't care what you say to everybody else, it cares what you say on its record. The reasoning is, if you're so sure you're not guilty of an offence, why haven't you sought to argue this in court? And if you weren't committing the offence, why did the informant serve the infringement notice in the first place? The act is not silent at all on this. If you don't request the hearing and serve such notice by the date required, you are liable to enforcement action - whether you deny liability out of court is irrelevant.
You would report illegal income via Schedule 1, line 8. At the bottom, after naming many specific legal sources of income there is a line 8z &quot;Other income. List type and amount&quot; with very little space. The instructions refer you to Miscellaneous Income in Pub 525. They do list &quot;Stolen Property&quot; as a category, saying If you steal property, you must report its FMV in your income in the year you steal it unless in the same year, you return it to its rightful owner. However, there is no requirement to report the illegal nature of your income, and it is not difficult to describe such income in non-incriminating terms, such as &quot;miscellaneous income&quot;. If they are not satisfied, you may inform them of your 5th amendment right to not incriminate yourself. Invoking your right to silence does not constitute probable cause for a search warrant.
You're not directly asking this, but I'm assuming what you're getting at is when do I owe the taxes upon receiving that pre-payment. This depends on your corporate structure as to how you can realize taxes. If you are DBA, LLC, or S-Corp you pay taxes based on your personal income at the end of the year as all earnings go to the owners because the business can't hold onto those. So if you receive those funds in Dec (assuming Dec is the end of your fiscal year), and you haven't delivered your service it doesn't matter you pay on the pre-payment funds which will really hurt you if you have to spend some of that pre-payment to deliver the service. If you are a C-Corp you can defer those taxes until you deliver the service as you can mark that revenue for the next year and several years as you deliver the service. What matters is how you declare your C-Corp's accounting practices for reporting your revenue to the IRS. What you want to do is be an accrual model. That will let you pay for things like salaries, COGS, etc before you know how much you made, and only pay taxes on the earnings at the tax rate of the corporation. Of course if you do this you would do this only if you want to keep that money in the corp to conduct business. You wouldn't want to pay corporate tax then pay personal income tax if you're the owner. So you'd want to pay out any earnings to yourself as a distribution (ie to all owners) or bonus (to individuals) to avoid the double taxation. Keep in mind I'm not an accountant, tax lawyer, but a guy who has been through exactly what you're asking. Consult professionals as needed because you'll be up your eye balls in contracts to build such a business and you'll need their help anyway.
It may be illegal under product labelling regulations that apply to that kind of product (or under a general deceptive trade practices act), but even then, only if you are interpreting the numbers, whose meaning is not clearly spelled out, correctly. But, to be actionable as fraud it must, among other things, be a misrepresentation as to a material fact (which if the goods, such as cordless drills, are not perishable it probably isn't) and the recipient of the misrepresentation must have justifiably relied upon the misrepresentation (which is necessary not true in the case of a representation that it was made in December 2018 on a product sold no later than July of 2018). It is also not entirely clear that this is a "made on" date. It could refer, for example, to the the twelfth batch or lot or shipment of products made in 2018, and not to the month of December, or it could refer to a product made in 2018 at factory number 12. @NateEldredge in the comments also makes the plausible observation that it could be a week number which is a common system in manufacturing which would put it in a more reasonable March 2018 time frame. You probably shouldn't do anything, because you haven't been harmed by this cryptic string of numbers embossed on the product, and even if you were, your damages would not be worth the time or money involved to pursue it as anything other than part of a class action lawsuit.
Two people exchanging goods or services on a commercial basis and then pretending it was two gifts is tax evasion. It's not a gift. It's a commercial sale that you lie about by 'putting' a different 'label' on it. Sometimes two people will give mutual gifts, e.g. if you come to my wedding: I give you dinner, you give me some kitchenware. Yet there's nothing commercial about it. So that's not income for either party. However, if you're talking about two businesses making sales to each other, that is very much income, regardless of what you badge it.
Ignoring morals, is there legal obligation for him to attempt to return the refund? No, but he must pay for the goods if the supplier asks. Does this fall under unjust enrichment? No. This is simply a contract law issue. The person is contractually obliged to pay for the goods and, in the present circumstances, they haven’t done so. If so, to what extent must he try? He doesn’t have to make an active effort to pay but he can if he likes. However, if and when the vendor realises their mistake and asks for payment, it must be made in a reasonable time.
In the U.S.: To my knowledge all states and jurisdictions that with a "sales tax" technically have a "use" tax, which means the tax liability falls on the purchaser. However, they require "businesses" (whose exact definition varies by jurisdiction) to collect and remit that tax on behalf of "consumers" (which can also vary, e.g., to exclude businesses that resell). Historically consumers have avoided paying use taxes by purchasing from out-of-state businesses that are not subject to their home states' laws on withholding the use tax: while technically a violation of the tax law neither consumers nor states have had an interest in calculating or auditing use taxes owed, except in the case of very large and unusual transactions. There is a large effort underway by states and "brick-and-mortar" stores that lose business to this virtual "mail order tax exemption" to subject out-of-state businesses to the requirement of collecting use taxes on behalf of the state. A few online businesses (notably Amazon) have acquiesced to this demand. To answer your question: In the U.S., an individual who is not making a "business" of selling items or services is generally exempt from the requirement to collect sales tax. It is the purchaser who has the legal obligation to declare and pay tax on such transactions. But purchasers rarely do.