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Everyone wants to save money, especially when it comes to taxes, and there are many exemptions and deductions available under state and federal tax codes to help you minimize your taxes.
However, when you use deceptive methods to save money on taxes, you risk facing significant penalties and perhaps jail time.
This article rounds up the most famous tax court cases—from Al Capone to Walter Anderson’s tax evasion—to show the high price you might pay for trying to pull a fast one on Uncle Sam.
The differences between avoiding taxes and evading taxes
There is a line between minimizing taxes through legal deductibles and evading taxes illegally.
Tax avoidance is a way to reduce your income tax bill. Some individuals and businesses can reduce their tax bills by using different tax avoidance strategies.
For example, tax deductions, tax credits, and income exclusion help you reduce your taxable income, which can help reduce your tax payments.
And tax loopholes are ways to reduce your tax liability without using these official tax breaks.
On the other hand, tax evasion happens when individuals and organizations employ illegal techniques to bypass tax payments to their country.
Some common examples of famous tax evasion cases include withholding the amount of taxes you must pay from the IRS, not documenting your business in your account books by doing transactions with cash without any invoices or using a hidden bank account to shield your assets and stocks from the IRS.
See also: Whitepaper: Five Proven Methods to Reduce Small Business Taxes
What types of cases are brought to the Tax Court?
The United States Tax Court hears federal tax cases. This is at the trial level, and citizens are not required to pay the tax money before the court has made a decision regarding the disputes.
Tax Court cases are not brought before a jury, and if the defendant is found to be evading taxes, they will be obligated to pay the taxes including interest.
The Tax Court can come to 1 of 3 decisions after the hearings:
- Summary decisions: Issued in small tax cases of individuals with $50,000 or less in backed taxes. Appeals cannot be made in these decisions.
- Regular decisions: Involve points of the law that are unusual. This decision is decided “en blanc” or by all of the judges of a particular court that hear the case.
- Memorandum decisions: Issued when the judge decides the case is a matter of what is established in the law or is factually driven. These decisions can be appealed.
Although they have exclusive jurisdiction in Washington, D.C., Tax Court judges also travel throughout the United States to preside over federal tax cases.
Most famous tax court cases in IRS history
1. Al Capone
Al Capone’s tax case is one of the most famous cases the IRS has ever dealt with.
This high-profile gangster was involved in various outlawed activities, including murder, prostitution, and bootlegging. However, only the income tax evasion for his revenue got him arrested.
2. Joe Francis
Joe Francis is a talented American entrepreneur, film producer, founder, and creator of Girls Gone Wild’s entertainment brand.
He was accused of criminal tax evasion in 2007 for allegedly filing fake business tax returns in one of the most famous tax fraud cases in recent history.
Francis is accused of submitting fake company expenses totaling more than $20 million to avoid paying taxes.
He was able to avoid the felony accusation by accepting a guilty plea rather than pursuing tax appeals.
However, he didn’t seem to have completely avoided his tax problems. In November 2009, the IRS issued Francis a $33.8 million tax lien.
3. Walter Anderson
Walter Anderson, a former telecommunications executive, was accused of using aliases, offshore bank accounts, and shell businesses to conceal his earnings.
Anderson pleaded guilty in 2006, admitting to concealing nearly $365 million in earnings.
He was condemned to 9 years in prison and paid $200 million in compensation.
Anderson avoided the majority of the taxes owed due to a typo mistake in the amount of the federal government’s judgment.
The IRS agreed to pay taxes and penalties for 3 years in this case. Anderson is, however, still liable for $23 million owed to the District of Columbia’s government.
4. Wesley Snipes
Wesley Snipes, the famous American actor, film producer, and martial artist, has been charged with numerous offenses by federal prosecutors.
He is accused of hiding money in overseas accounts and failing to file federal tax returns on his income for many years. The prosecutors estimated his tax debt to be $12 million.
He was convicted of a misdemeanor in 2008 after being acquitted of felony tax evasion and conspiracy charges.
Snipes got to do 3 years in prison. Meanwhile, Douglas P. Rosile (Snipe’s accountant) and Eddie Ray Kahn (tax protester) had to serve prison time as co-defendants in Snipe’s tax evasion case.
The court gave Rosile a 4.5-year sentence and Kahn a 10-year sentence.
5. Leona Roberts Helmsley
Nicknamed “The Queen of Meanness,” this hotel operator is said to have told a former housekeeper that she didn’t pay taxes.
Helmsley and her spouse have amassed a fortune in real estate.
In spite of their vast wealth, they are accused of charging their businesses millions of dollars in personal expenses to evade taxes.
In 1989, Helmsley was sentenced to three tax evasion cases. She did 18 months for her sentence.
What are famous Supreme Court tax cases?
While the majority of tax cases are handled by the United States Tax Court, controversies over income, tax exclusions and deductions, accounting methods, and assets may gain enough traction to reach the Supreme Court.
Below is a list of the 5 most recent cases:
1. South Dakota v. Wayfair, Inc. (2018)
In South Dakota v. Wayfair, Inc. the Supreme Court decided to eliminate the need for sellers to have a physical location or presence in the state to collect and remit sales taxes to the taxing state. This ruling allowed states to receive sales taxes from transactions through e-commerce.
2. Comptroller of Treasury of Maryland v. Wynne (2015)
The Comptroller of Treasury of Maryland v. Wynne is a decision by the Supreme Court that ruled it was against the Constitution for a state to fail to offer a full credit for the taxes they paid to other states.
3. U.S. v. Windsor (2013)
In U.S. v. Windsor, the Supreme Court ruled that it was unconstitutional to discriminate against same-sex partners according to Section 3 of DOMA. Federal benefits and tax exemptions were now to apply to gay and lesbian couples married under the state.
4. Jones v. Flowers (2006)
The Jones v. Flowers case decided that, when mailed notice of a tax sale is unclaimed, the taxing State should further attempt to notify the owner of the property before selling it.
5. Gitlitz v. Commissioner (2001)
Gitlitz v. Commissioner determined that the corporation’s discharged debt could not be used to increase their bases in the stock of an S corporation.
Looking for more interesting tax facts? Check out this article!
Have there been any tax cases won against the IRS?
While you might think the IRS has a leg up against taxpayers in court, this isn’t always the case.
In fact, according to this IRS document of most litigated issues, taxpayers win their cases against the Internal Revenue Service about 14% of the time.
While rare to win, it’s not impossible.
Here are 2 well-known cases where citizens faced the IRS in court and won:
1. Vernice Kuglin case
In 2003, 58-year-old Vernice Kuglin claimed to not have filed a tax return or paid taxes in 6 years after amassing over 1 million dollars in wealth.
Vernice Kuglin is brought to court
She was brought to court under the suspicion of committing felony tax evasion and faced $1.5 million dollars in fines and up to 3 decades in prison.
Kuglin’s attorney, Robert Bernhoft, presented Vernice’s case to the jury and claimed that his client was simply waiting for the government to respond to her concerned inquiries.
Kuglin’s Beliefs
Vernice Kuglin held suspicions that the IRS was misusing the tax structure as outlined by the Founding Fathers and had spent the previous 6 years asking the IRS to answer her questions about her tax obligations without being heard.
The Verdict
Surprisingly, she was acquitted on all 6 counts stacked against her after the Memphis jury ruled she was not criminally evading her tax obligations.
Watch the interview with Vernice Kuglin below:
Caption: Vernice Kuglin interview, Raymond Rider
2. Lori Singleton-Clarke
In 2008, Lori Singleton-Clarke, a nurse from Maryland, was brought before a tax court judge over a dispute involving a $15,000 tax deduction for her MBA Health Care Management school tuition.
The case against Lori
The IRS claimed that her MBA tuition was not essential to her career as a nurse, but Lori Singleton-Clarke insisted that the education was to improve her credibility amongst doctors.
The verdict
In 2009, after much deliberation, it was decided that Singleton-Clarke’s tuition fees were not applicable to another business or career but helped her to cultivate her skills for her profession as a nurse.
In an astonishing victory, Lori Singleton-Clarke, who represented herself in court, won her case against the IRS.
Frequently asked questions on famous tax court cases
According to NBC News, billionaire Robert Brockman’s tax evasion case is the most serious in U.S. tax court case history because he was charged $2 billion worth of tax evasion.
However, when he died at 81, he insisted on being innocent of the Justice Department’s indictment.
He received charges involving 39 invasion cases in money laundering, wire fraud, and capital gains.
a. Faking accounting-related data
People can fake records by lying to their accountants. Generally, your CPA will send you a questionnaire to answer. Your answers and financial data help the accountant to calculate taxes for payment and tax returns.
b. Intentionally not paying enough taxes
Usually, your accountant’s reports identify how much you need to pay. Yet, some individuals will evade taxes by not paying the correct amount of what is owed on their tax returns.
c. Using overseas accounts and concealing interest
Utilizing overseas accounts to avoid paying taxes is one way some individuals attempt to evade a large tax bill. Especially when they accumulate their assets in international banks where interest increases fast. To curb this type of tax evasion, the IRS imposes the Foreign Account Tax Compliance Act (FATCA), which “requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments.”
d. Illegally designating income on family members
Claiming that the income belongs to someone else, such as family members or friends, is an illegal tax evasion technique. You’re committing a federal offense if you try to cheat the government by stating your income is someone else’s to avoid paying taxes.
1. You accumulate tax interests and fines. If you don’t pay your taxes on time, the IRS will charge you interest on the amount you owe. The interest rate on your loan is usually around 5% or 6%. You may face penalties and interest if you don’t pay your taxes on time. The IRS can also tack on a late payment fee of 0.5% per month, which can add up to a penalty of 25%.
2. You receive a letter of notice from the IRS after 1 to 3 months.
3. You may get tax liens and a collections visit from the IRS after 2 to 6 months.
The 3 types of Tax Court decisions are as follows:
1. Summary decisions
2. Regular decisions
3. Memorandum decisions
Bonus infographics: Four examples of tax evasion methods
Final thoughts on famous tax court cases
If you don’t pay the required taxes, you can get in trouble with the government. This could lead to severe penalties, like having to pay more taxes or having your citizenship revoked.
If you use legal tax avoidance methods, you may be okay. But if you try to avoid paying taxes, you will face a heavy penalty.
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