Mental Illness: Does it Excuse Tax Fraud?
TAX ADVICE from Julian Block
(December 8, 2004) Q. The Internal Revenue
Service contends that I filed fraudulent returns. So the
feds have billed
me for back taxes and nondeductible
interest charges. To really twist the
knife, they want to assess sizable civil fraud penalties,
also nondeductible. Fortunately, the
government will not bring criminal charges, which could have meant a lengthy stay in
My contention is that mental problems caused me to file
1040 forms that were inaccurate, but not fraudulent. According
to my attorney, it is
unlikely that the IRS will drop the fraud penalties. In that
case, one of my options is to have the dispute resolved by
the United States Tax Court,
which is entirely independent of the IRS and is the only
forum where I can contest additional taxes, interest and
penalties without having to first
pay the disputed amounts. How would you rate my chances of
persuading the Tax Court to see things my way?
A. The outcome depends on the particular facts and
circumstances of your case. Unsurprisingly, the court closely
scrutinizes a claim that mental
or other medical problems justifies relief from penalties.
For instance, it was unmoved by the medical problems of
certified public accountant Robert Parker of Champaign, Ill.
Robert held top-level
positions with the University of Illinois, its fund-raising
foundation, and a foundation-owned company, U.D. Corporation.
moonlighted preparing tax returns.
In his off hours, the Champaign CPA caroused at the Club
Taray, a dive decorously described as follows by the Tax
Court: "The nightclub
featured female dancers as entertainment. The women danced
on stage and slowly removed their clothes. When the dancers
customers could purchase their companionship by buying them
cherries and bubble bath powder. "
Club patrons who wanted to consort with strippers had to
shell out big bucks for drinks, the court noted. "Cherries
cost $12 each. The price of
bubble bath powder started at $48 and increased depending
on the degree of privacy sought."
During a five-year period, Robert's authority over U.D.'s
checking account enabled him to embezzle $604,000, a misappropriation
accomplished by writing checks, including $90,000 to Club
Taray and $397,000 to women "engaged for sexual activity." The
following year, the
State of Illinois convicted him on charges of criminal embezzlement.
Then the IRS came on the scene, as Robert did not report
the embezzled funds as income; the agency reckoned he was
liable for back taxes of
$347,000 and civil fraud penalties of $174,000, plus interest
Wrong; he was more sinned against than sinning, explained
randy Robert to the Tax Court. He had been mentally ill and
controlled by the
women and the club's manager, an assertion contradicted by
their testimony that he alone decided when to write checks
and in what amounts,
and had never been threatened by them.
To bolster his claim that he was merely a conduit through
which misappropriated funds were channeled to third parties,
Robert claimed that he
derived no benefit from or enjoyment getting into bed with
these women; "that was their idea, it wasn't my idea." The
judge held Robert owed the
taxes and penalties, saying: "It is apparent that any
illness he may have had did not interfere with his ability
to recognize taxable income."
Julian Block lives in Larchmont and is a syndicated
columnist, attorney and former IRS investigator who
the New York Times has called “a
leading tax professional.”
His “Year Round Tax Savings” shows
how to save big money on taxes – legally. To
purchase a copy, email: at firstname.lastname@example.org.
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