Lavish Spending is Not Tax Evasion

A recent court decision took up the question of whether lavish spending alone, in the face of a tax debt, should be considered willful tax evasion.  Trip Hawkins, founder of Electronic Arts, is one of those super wealthy, elite class Americans who fell on hard times — a different sort of “hard times” than most people are familiar with, but hard times nonetheless.  He has IRS and FTB (California Franchise Tax Board) tax debts up to his eyeballs, something like $25 million, which he sought to have discharged in bankruptcy.

The government asked the bankruptcy court to exempt his tax debts from being discharged because he acted in a willful, tax evasive manner.  After acknowledging the tax debt, it was shown that he was spending up to $78,000 more each month than he was earning.  He was maintaining a $3.5 million home and a $2.6 million ocean-view condo.  He was buying $70,000 cars and cruising around in a private jet.  However, the court concluded that this sort of spending behavior, extravagant as it seems to regular folks, was not enough to prove willfulness.

I don’t imagine there are too many people living this lifestyle in valley towns like Modesto, Tracy, Turlock, or Oakdale, and its not simply for lack of ocean-view condos.  However, this issue does tend to crop up here in other contexts and on a much smaller scale.  For example, I have seen the California Board of Equalization (BOE) and FTB draw adverse conclusions on the grounds that a taxpayer was living too lavishly.  In the process of resolving a tax debt, these taxing entities look closely at bank statements to see how taxpayers are spending their money.  I have seen them raise an eyebrow at things like going out to much on weekends, eating out too much, taking too many trips, etc.  While this lifestyle is not going to land somebody in prison for tax evasion, it can sometimes make it more difficult to obtain an accepted installment agreement, or offer in compromise.

I’m not sure I really have to spell it out, but their thinking is “why should this taxpayer be allowed to live like this when he owes taxes; he needs to curb his spending so he can pay off his tax debt.”  This is just something to keep in mind when dealing with California taxing entities.  In my experience, the IRS is concerned with this kind of thing too, but to a lesser degree.

Billionaire evades prison time for evading millions in taxes.

Back in September 2013, we reported that your Beanie Babies in the attic may become more valuable because Beanie Baby creator, Ty Warner, was facing charges for evading his federal taxes. Last week Judge Charles Kocoras “sentenced” billionaire (with a “B”) Warner to two-years probation and 500 hours of community service for his tax crimes.

The sentence, or lack-there-of, is actually a bit surprising. The government often seeks harsh punishment in high profile cases knowing that punishing the infamous will have a chilling effect on less substantial, but still costly, tax crimes committed by regular citizens. Judge Kocoras rejected such punishment in this case based on Warner’s “good works” in society.

Warner pleaded  guilty to tax evasion and paid a civil penalty of $53.6 million for failing to report$3.2 million in income on a secret Swiss bank account that held as much as $93.6 million in assets. Unfortunately for Warner, he attempted to avoid prosecution and take advantage of one of the government’s many offshore voluntary disclosure amnesty programs, but was denied tax relief. In addition to the civil penalty already paid by Warner, Judge Kocoras fined Warner an additional $100,000.

I was actually looking forward to the tax evasion Beanie Baby. However, now we’ll probably have a reincarnation of the fad, and all its versions, so Warner can pay his fines.

Introducing the tax evasion beanie baby

This week, the creator of the Beanie Baby toy phenomenon, Ty Warner, was charged with tax evasion. The charges allege that Warner committed tax crimes on his 2002 tax return by failing to report $3.2 million in income on a secret Swiss bank account that held as much as $93.6 million in assets. The federal government alleges that Warner falsely reported his 2002 income as $49.1 million, omitting money he made on his UBS account. He amended his 2002 return in 2007, yet it is alleged that he again understated his tax by $885,300.  In 2009, Warner tried to avoid prosecution by taking advantage of the Internal Revenue Service (IRS) amnesty program known as the Offshore Voluntary Disclosure Program. According to Warner’s tax attorney, the IRS denied amnesty to Warner.

Warner is expected to plead guilty as part of a plea agreement and will pay a civil penalty of $53.6 million for failing to file a required Report of Foreign Bank and Financial Accounts (FBAR). Warner is not the first UBS client to be prosecuted for tax crimes. Since 2009, the United States has prosecuted approximately 70 taxpayers, 30 bankers, lawyers and advisers in a crackdown on offshore tax evasion. I wonder if this is the time to sell those Beanie Babies I have in the attic.

Pimping Isn’t Easy When the IRS is Watching You

You usually hear about the IRS wielding its power to criminally prosecute tax offenders in those cases where the dollar amount involved is great or the notoriety from the case will make lawful taxpayers think twice before fudging the numbers on their tax returns. I was a little surprised when I read about Johnny Ray Taylor, who recently pled guilty to tax evasion in U.S. District Court in Las Vegas earlier this week, until I read-on.

At first glance, the headlines capture you about a panderer and pimp, needing to cut a deal with the IRS. How much could such a “profession” really bring in? Surely not enough to catch the attention of the IRS; wrong! According to Taylor’s plea agreement, he copped receiving gross income in excess of $230,000 for tax year 2010. Although he didn’t file tax returns for tax years 2008, 2009, and 2010, he agreed to pay restitution in the amount of $117,559.82 to the IRS for those tax years. He’s presently awaiting sentencing. I’m still curious as to how much money he really “earned” since he cut a deal admitting that he earned in excess of $230,000 for just one tax year alone.

United States Files Criminal Tax Charges Against Bubba

According to the associated press, three time Super Bowl champion and former San Francisco 49er Bubba Paris has been charged with failing to file his federal income tax returns over a three year period.

The U.S. Department of Justice announced that Paris has been charged with three misdemeanor charges of failing to file tax returns in 2006, 2007 and 2008. Prosecutors allege that Paris received gross income of more than $57,000, nearly $84,000 and almost $42,000, respectively, in each of those years.

What interests me about this case, besides the 49er who was one of my favorites in the 1980’s, is the amount of money involved and Paris’ lack of true notoriety. While there are exceptions, the government generally prosecutes criminally for non-filing or non-payment of taxes only in cases of extreme income or evasion, or major notoriety i.e. the press garnered from the prosecution will warn the general public to timely file and pay their taxes. Here, the income levels alleged, if correct, are hardly kingpin status. In regards to Paris’ notoriety, the government missed their mark by about 25 years. Even in the Bay Area, most 49er fans may not know the difference between Bubba Paris and Bubba Gump.

Nonetheless, Paris now needs a tax attorney to get him tax relief. I suppose the government’s purpose would be to warn those with smaller incomes, that they too may be the subject of criminal prosecution for otherwise minor tax crimes. Be warned … if you earn approximately $45,000 a year and you miss a tax deadline … you may be doing hard time.


The Sacramento Gold Dust Mystery

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In these days of FATCA and offshore accounts, for some it is hard to imagine those days when the preferred place to hide money was under a mattress or in a backyard hole.  There could be many reasons for wanting to conceal one’s true wealth, but few of them tend to be very honest.  Although, I suppose some people just don’t trust themselves to spend their own money responsibly.

The technicians at Clark & Rush, a Sacramento-based heating & A/C company, found $300,000 worth of gold dust packed away in 12 old baby food jars.  They happened upon the stash in September while doing an installation on an old home in Sacramento.  The gold dust was given to the homeowners who requested that their names not be made public.  Looks like somebody has some secrets.

Some people try to illegally hide money and assets from the IRS, and there is literally no end to the creativity.  But whether it is done in an effort to pay less taxes or to escape the collection arm of the IRS in an asset seizure situation, it is the wrong approach to tax relief.  No competent tax relief attorney will ever advise you or help you to do this.  A tax attorney will assist you with tax avoidance so that you pay only as much as you are legally required to pay, but will never help you with illegal tax evasion.

Dolce & Gabbana Face Tax Evasion Charges

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Italian fashion designers Domenico Dolce and Stefano Gabbana allegedly owe in the neighborhood of 1 billion euros in back taxes (that’s equal to $1.25 billion this side of the pond), and of course they deny it.  I’m sure they’re innocent, since Italians are so good about paying their taxes.  FYI, the only nation with more tax evaders than Italy is Greece.  Here is Gabbana’s well-reasoned tweet from earlier today:

Everyone knows that we haven’t done anything.

With 140 available characters that’s all he could say for himself!?  I wonder if Dolce is any brighter than Gabanna.  The Italian tax authorities have beeen investigating the two since 2007.  A lower court acquitted them, but the government appealed, so their quest for tax relief continues.

Based on the designs pictured in this post, Italy should consider taxing D&G at an even higher rate.  Maybe if they taxed these designs like cigarettes it would discourage anybody from wearing them.

IRS Shuts Down Granny’s Suicide Kit Sales

Going back in history, the government has always used the Internal Revenue Service to shut down underground businesses that are illegal or immoral.  If the law does not support the government’s case, or if the facts and evidence are not in its favor on other charges, the government often has “tax evasion” in its back pocket.  Al Capone is the prime example.

This week’s Al Capone is a 92-year-old lady from Southern California named Sharlotte Hydorn.  She was convicted and sentenced to 5 years supervised probation for failing to file and pay taxes on the income she earned from suicide kits she sold from her home.  She was also ordered to work out a way to pay off her IRS tax debt.  As you probably guessed, there is no federal law addressing assisted suicide.

My question is “where was her family?”  I know her husband is deceased — it was his death that sparked Hydorn’s interest in benevolent killings.  But she needed somebody by her side to tell her things like:

  • Maybe you should be a little more careful about who you’re selling these kits to; like maybe find out their age and circumstances first.
  • Maybe you should be paying taxes on this income
  • Maybe when grandpa whispered “home, home” on his deathbed he wasn’t asking to die in the comfort of his home.  Maybe he was trying to communicate to you that he was now going “home” to his maker.

I realize that last point is pure speculation.  But hey, if it were true then Hydorn certainly never would have started selling suicide kits in the first place.