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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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do state tax laws apply to money obtained illegally from the

Resolved Question:

do state tax laws apply to money obtained illegally from the federal government i.e. social security fraud after one is convicted in federal court or do those laws not apply after one is convicted? I was assessed by the dept of revenue in Massachusetts for 19k with penalties and interest on money that I obtained fraudulently from Social Security--SSDI money, and now the state thinks I should pay them income tax money on the money that I collected over an 8 year period. My tax attorney is fighting to discharge this money by citing the 6 year statue of limitations and mass laws on social security money along with how I filed my federal returns with no malicious intent to defraud the state, but this matter could go to a judge if the dept of revenue refuses to settle with me for $1000. Do the same laws apply to money obtained legally versus illegally, or do those laws not apply once one is convicted in federal court?
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.

Hello JA Customer,


All income, legal or illegal, is taxable both at the federal level and the state level. It does not matter if you were actually convicted or not.


While SS disability income may not be taxable in a situation where it is obtained legally, it would be taxable if it were obtained by means of fraud and the amount was not repaid to SSA. As far as the 6 year statute of limitations, that does not apply in cases where fraud is involved. They can go back indefinitely in fraud cases and assess taxes you owe on income that was not included on your return.


The best case scenario for you would be to try and reach a settlement agreement with the state for a lower amount than what they are actually assessing you for, because legally you are liable for taxes on this income.



Thank you JA Customer



Customer: replied 7 years ago.
i included my state income taxes on my federal returns, and there was no malicious intent to defraud the state or federal govenment. I pled guilty to social security fraud because i was making too much for their rules, not because I was not disabled. Is this money that I owe the state considered tax fraud now because I was convicted federally and if I still owe this money to the state after being convicted even though I filed my returns accurately and legally, why doesn't the state go after me for tax fraud, even though the amount is not large enough to litigate? Do you think the state will settle with me, or do you think they will want the entire amount, and do you think the state will send this matter to a judge? My tax attorney is trying to get me to settle for $1000, but I don't know if the state will accept that amount. What would be a "good"settlement in your opinion, or would you just suck it up and may payments on the 19K? I am making restitution payments to the court system now after going to jail and pleading guilty.  My restitution is outrageous, and I am hardly a wealthy person, and I know the state and federal government doesn't care about those things, but will they take these things into consideration?
Expert:  Merlo replied 7 years ago.

Hello again JA Customer,


When you apply for SS disability benefits and you are approved, you are only allowed to have a certain amount of other income while collecting those disability benefits. If your income exceeds the amount allowed, then you are considered to have gainful employment and not eligible for those benefits. If you continued to have earned income which exceeded the amounts allowed by SSA, and continued at the same time to collect those benefits, then this is intent to defraud the government no matter how else you look at it. It does not matter that you still considered yourself to be disabled in some way. The fact that you were convicted in federal court is just further proof of the existence of the fraud.


The state does not have to pursue you with criminal charges if they do not choose to do so. And most states are simply interested in collecting the tax money they are due without filing criminal charges. If the amount were larger than $19,000 then they may consider filing criminal charges for tax fraud, but they are really more interested in collecting the taxes that are owed to them.


There is no way that I can guess whether or not the state would settle with you on this for a lower amount. Generally it depends on your financial condition and whether or not the state thinks they have a reasonable chance of collecting the full amount you owe. If you have a reasonable amount of income or if you own assets such as a home or if you have money investments or any other assets of value, the state can and will put liens and levies on those assets, and would be unlikely to settle this debt for less than what you owe. On the other hand if you own no assets and you do not have enough income where it is likely they can ever collect the full amount you owe, then they may be willing to settle with you for a lower amount.


If you feel you do not have enough assets or income to pay what you owe them either in full or through a payment plan, then your attorney should present them with a complete breakdown of your financial situation, along with an offer for what you can reasonably afford to pay. They may accept your offer or they may come back with a counter offer, or they may not accept it at all. It really just depends on your financial situation and if the state feels you have enough assets at your disposal that they could collect the entire amount you owe them.



Thank you again and best of luck to you in getting a satisfactory resolution on this.



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