Tax Litigation Law Office of Scott Kauffman
(949) 474-1820

Hackney Literary Award
Mighty River Short Story Contest Winner

A look at history as tax fraud charges again make headlines

One of the most famous tax fraud cases of all time sent Al Capone to prison. Those charges were mostly based on circumstantial evidence, because the famous Chicago gangster only endorsed one check and never had a bank account in his name.

The government proved Capone had an ownership interest in a gambling house. In addressing a defense claim of “no income,” a New York Times archive article described the prosecutor’s voice growing more bitter as he compared lavish expenditures (Diamond belt buckles and $113,000 race track losses) to ordinary folk expenditures.

The jury ultimately found Capone guilty of only five (two misdemeanors of failing to file in 1924 and 1928 and three felonies of attempting to evade taxes in 1925, 1926 and 1927) of the 23 counts. Capone reportedly smiled with the verdict, probably believing he had gotten off easy.

A warning to future generations

During the trial, the prosecutor said, “[i]f the time ever comes when our people pay taxes only when the government must hound them and investigate them, then the government with fail, justice will disappear, our courts will be swept aside and organized society will revert to the jungle.” This might be overly dramatic, but compliance has significantly improved since the late 1920s.

Today, payroll tax deductions and third-party reporting allow computers to match up information and algorithms search for irregularities. Audits kick off when there are mismatches or claimed losses are far outside of what is normal in an industry. The IRS has estimated the voluntary compliance rate at almost 82 percent.

Willful conduct

Referrals for criminal investigation require a willful element. Wealthy business owners and individuals may be targeted for failing to report gross business receipts or personal income, “manufacturing” deductions or diverting income to offshore accounts. The cases that the agency pursues today often have much better paper trails than in the time of Capone. The penalties are still equally serious and almost always carry prison time.

No Comments

Leave a comment
Comment Information