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Sarah Palin: The Case of the Unreported Income

Monday, October 6, 2008 11:20 AM - By Elie Mystal

Palin Vogue.JPGLate Friday night, we reported that Sarah Palin’s tax returns failed to report the per diem reimbursements she received as governor of Alaska. Over the weekend our commenters weighed in:

This is an easy income tax question. Any 1L/2L taking an income tax class could have answered this problem. Yes, the IRS usually relies on employer’s W2 forms. That’s for administrative convenience. For the most part, the IRS doesn’t want to audit every employee’s fringe benefits, which would be an incredible waste of tax dollars. That being said, the governor, with all her qualifications and knowledge regarding the U.S. system of governance, should have known that a per diem (worth how much over the last 18 months?) should be included in her tax return. If my employer reimbursed me for tens of thousands of dollars (for what expenses?), I would at least think about whether this was income.

But ATL weekend readers concluded that Palin will likely face no criminal liability:

The answer is probably that Palin is civilly responsible for underreporting income and underpaying taxes, but is not criminally responsible.

Criminal tax violations require “willfulness”. In the criminal tax arena, the Supreme Court has interpreted that as a pretty tough standard — approaching actual intent to violate a known obligation. See Cheek v. United States (1991). But a taxpayer is civilly liable for taxes whether or not she knew or had reason to know of the liability. (You’re still liable even if you relied in good faith on your accountant; even if you thought you didn’t have to pay; even if you made just a math error). And the IRS can require payment of back-taxes for whatever years are still within the statute of limitations, which almost certainly would include Palin’s limited time as governor.

So to the extent [Roger] Olsen [Palin’s tax lawyer] is simply saying that Palin won’t be criminally prosecuted, he’s right. To the extent he’s saying that the IRS would believe Palin current on her obligations, he’s wrong — she’s going to have to file amended returns and send in a check.

Tax professors comment after the jump.

TaxProf Blog concluded on Friday that there were errors in Palin’s returns. Now others are weighing in.

Jack Bogdanski reports:

[O]ne commentator has reported that there is now a “wonky debate” as to the correctness of their omitting the travel money from their tax returns. We disagree. There is no serious debate (at least, none that has been brought to our attention) about the fact that at least the amounts paid for the children’s travel — $24,728.83 in 2007, according to the Washington Post — are taxable. The campaign’s tax lawyer has got at least that much of the law, and perhaps more, wrong.

Meanwhile, Bryan Camp of Texas Tech University School of Law explains the problems with Roger Olsen’s opinion letter in defense of Palin:

1. The Palins did not report as income some $17,000 that Governor Palin’s employer (the State of Alaska) paid her as an “allowance” for her travel. Can they do that? Yes, most likely.
2. The Palins did not report as income some $43,000 that the State of Alaska paid the Governor as an “allowance” for her husband and children’s travel. Can they do that? No, most likely not.
3. The Palins deducted $9,000 on their 2007 return, claiming it was a loss from Mr. Palin’s snow machine racing activity. Can they do that? Most likely not, but more info could make the deduction o.k. If any of the above issues goes against the Palins they then risk getting hit with the section 6662 penalty for “negligence or disregard of rules or regulations.”
4. Can the Palins avoid the section 6662 negligence penalty by claiming that they reasonably relied either (a) on the W-2’s sent to them by their employer, which did not reflect either the $17,000 or the $43,000, or (b) on their tax return preparer H&R Block, or (c) on Mr. Olsen’s opinion letter dated September 30, 2008? The three reliance defenses are unlikely to succeed, but more info may make the (b) defense a good one.
5. Does Mr. Olsen have any exposure to sanctions by the IRS because of his letter? I believe Mr. Olsen’s letter probably violates 31 C.F.R. section 10.35. If so, he would be exposed to possible sanctions from the IRS Office of Professional Responsibility.

The mainstream media seems to think that these are important issues with Palin’s tax returns as well. The WSJ Law blog excerpted the same quotes from Bogdanski and Camp as we did.

Is this a real scandal or an accounting error? We expect the McCain-Palin campaign or Roger Olsen to update their position soon.

Tax Profs Agree: Gov. Palin’s Tax Returns Are Wrong [TaxProf Blog]
There’s no debate: Palins owe thousands in back taxes [Jack Bog’s Blog]
A Brief Analysis of Governor Palin’s Tax Returns for 2006 and 2007 [SSRN]
With Palin’s Returns, Tax Profs Move Back to the Spotlight [WSJ Law Blog]

Earlier: Palin’s Lawyer Defends The Governor’s Tax Returns

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Posted in: Sarah Palin, Tax Law

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