Irony is a word that comes to mind when reading the facts of a recent case in U.S. District Court in St. Paul. Judge Wilhelmina Wright stated it a little different, "When a person in a position of trust violates that trust, the public is a victim."
A former tax judge and her husband were convicted and sentenced on charges they conspired to obstruct IRS audits. Over a number of years, they passed off personal expenses as Schedule C business expenses, failed to claim income from the sale of a property and made false claims to avoid payment of tax on cancelled debt.
Mischaracterization of deductions, failure to report income and false claims
Any argument related to a mistake in applying the tax code doesn't go very far when the taxpayer has served as a Tax Court Judge for almost 20 years.
Many of the deductions that were dumped into the business expenses category were blatant - nine vacations, including trips to the Bahamas, Greece and Thailand, wine club fees, Pilates classes. Others might fall into the questionable category, such as a computer and Chinese tutoring classes, which could potentially be "ordinary and necessary" business expenses depending on unique circumstances.
Failure to report the gain on the sale of property in South Dakota and a false claim of financial insolvency to get out of paying tax on cancelled debt were other problems.
These may sound like issues that could have been handled with an assessment of back taxes, penalties and interest. But the couple apparently took steps to conceal documents from a tax preparer and IRS Tax Compliance Officer during the audit of their 2004 and 2005 taxes. The pattern continued and in a 2012 audit they sent false and misleading documents to the IRS.
When it became apparent that the 2012 audit might lead to criminal charges, the judge instructed her husband to lie to the IRS regarding her involvement in preparing information related to the business expenses.
By overstating the business expenses, failing to report income and avoiding taxes on cancelled debt, the couple understated their taxable income by almost $1 million and lowered their tax obligation by about $450,000.
The 61 year old judge was sentences to 34 months in prison and her husband received a slightly shorter sentence of 24 months. They were ordered to repay $457,105 in joint restitution.
This illustrates how important it is to get immediate legal representation at the first indication of an audit. Failing to take action or trying to cover up past misdeeds or mistakes can shift a civil matter into a criminal investigation.