These long fabled tales should serve as a cautionary lesson before tax season. Learn how to avoid making the same mistakes they did.
‘Tis the season to make sure your taxes are in order.
You’ve been planning for this all year, right? Well, if not, you can always go the route of one of these famous fraudsters, though of course, we wouldn’t recommend it. The taxman always gets paid.
Before we talk famous frauds, however, a word of caution about scammers out there posing as the IRS:
“The IRS never emails correspondence, this is someone trying to get your data and scam you,” says Andrew Carroll CPA/PFS, CITP, CGMA, the general manager of NCH Tax & Wealth Advisors in Fullerton, California.
“All correspondence with the IRS begins and ends with a physical letter mailed to your address,” adds Carrol. “So don’t call and give anyone information, and never do it without someone who knows what they are doing to help you.”
Now that’s we’ve cleared that up, read on for a roundup of the most famous tax frauds in history, starting with, who else? Al Capone.
The Prohibition-Era Chicago gangster, Al Capone faced an interesting conundrum when the federal law was changed in 1916 to allow unlawful activities to be taxed.
Either he could claim income from his racketeering activities and pay taxes on it, which basically involved confessing, or he could evade paying tax altogether. He chose the latter and went to prison.
According to the FBI, Capone was convicted on October 18, 1931, and subsequently sentenced to eleven years in federal prison.
He was also fined $50,000, charged $7,692 for court costs, and had to pay $215,000 plus interest due on back taxes. Capone served his sentence at Alcatraz and at the U.S. Penitentiary in Atlanta.
Leona Helmsley was convicted of tax evasion in 1989, after many years of incorrectly categorizing personal expenses as business expenses. During her sensational trial, reported Forbes, it came out that Helmsley said: “We don’t pay taxes. Only the little people pay taxes.”
She served 21 months in federal prison for the evasion, but perhaps the most bizarre part of the Helmsley saga is the fact that the so-called Queen of Mean left a chunk of her fortune to her dog, a white Maltese named, Trouble.
According to ABC News, the dog recently passed away after living in the lap of luxury until the end. The annual bill for its care? $100,000.
If you’d prefer not to go down the same road as Helmsley, keep in mind that IRS audits are most commonly triggered by large changes and differences from the average.
“If you double your revenue in a year, that can trigger an audit,” says Carroll. “If you make $200k a year and the average charitable contribution for people making $200k is $10k and you say that you donate $20k that is usually a red flag as well.”
Also, be careful with your business balance sheet.
“I have seen more audits triggered off changes to the balance sheet of a business than anything else,” adds Carroll. “Your inventory jumping up, total assets changing a lot, everyone worries about the income and expense side and doesn’t pay much attention to the balance sheet. But the IRS is looking at them for sure.”
According to Investopedia, Anderson is a former telecommunications executive convicted of hiding approximately $365 million worth of income via a combination of aliases, offshore bank accounts and shell companies.
He entered a guilty plea in 2006 and was sentenced to nine years in prison, and restitution of $200 million.
“The only way to eliminate your U.S. tax obligation is to renounce your citizenship,” cautions CPA Andrew Carroll. “And anyone that tells you that you can avoid taxes by investing in something overseas is probably deceiving you.”
The craziest part of this story? A typo in the amount of the federal government's judgment against Anderson has prevented him from having to pay the majority of the amount owed.
Once upon a time, a federal investigation of tax evasion led directly to the creation of a new album. This was the case when Willie Nelson was presented a bill of $16 million (reduced to $6 million) by the IRS for back taxes owed in 1990.
Because he didn’t have that kind of cash laying around, Nelson recorded Who’ll Buy My Memories? (The I.R.S. Tapes).
According to Forbes, the IRS began examining Nelson’s returns in 1984 and found a large deduction for tax shelter investments promoted by his former accounting firm.
The agency reached an agreement with Nelson that led to the creation of the aforementioned album, which netted the IRS $3.6 million. He paid off the rest via other projects.
There are dozens of cases of celebrities who avoided paying income tax, but Nicolas Cage makes the list for his unique spending habits.
“Easily my favorite famous tax fraud is Nicholas Cage,” says Micah Fraim, CPA, and author of The Little Big Small Business Book. “He owed about $13 million in back taxes to the IRS. The amount on its own is impressive, but the backstory is what makes it amazing.
He blamed his financial manager for leading him down the path of financial ruin, all the while spending money on absolutely insane things, including two albino king cobras and a private island.”
Former U.S. Vice President Spiro T. Agnew pleaded no contest to tax evasion for receiving bribes and paid thousands in fines and back taxes. He resigned from office in 1973.
According to Real Clear Politics, Agnew was formally charged with accepting bribes of more than $100,000. He resigned and entered a plea of no contest to charges of evading income taxes. The disgraced Republican VP was given three years’ probation and fined $10,000 for his actions.
A civil court revealed in 1981 that Agnew had accepted the sum of $147,000 in bribes while governor of Maryland, and he received $17,500 while he was serving as Vice President.
Avoiding Accidental Fraud
We know that getting your taxes filed correctly and on time can be a challenge. That’s why it usually pays to get some help.
“Nowadays it is so complex you are almost certainly missing something,” says Carroll. “And having someone as a resource throughout the year is often worth what you pay for your return. I also think that many people, if you are keeping halfway decent records, might be surprised at how affordable it is to have someone prepare your return.”
Our advice? Find a reputable tax preparer and sleep better at night.