When it Comes to Taxes, Remember, Pigs Get Fat and Hogs Get Slaughtered!

Well, here we go again. More headlines.

This one really looks bad.

A former U.S. tax court judge and her husband have been indicted on charges that they conspired to evade federal taxes. Diane Kroupa and her husband have been charged with conspiracy to defraud the United States, tax evasion, making and subscribing false tax returns ,and obstruction of an IRS audit.

According to the documents filed with the court, the couple understated their taxable income and the amount they owed in taxes. They have been accused of fraudulently deducting at least $500,000 of personal expenses they listed as business expenses and another $450,000 in trumped-up business costs.

According to various news reports, the federal charges allege expenses labeled as “business costs” that instead went toward Pilates classes, wine club fees, Chinese tutoring and airline flights. The charges in the complaint state that the couple also failed to report about $44,520 received from a land deal, instead claiming it was part of an unrelated inheritance.

Kroupa was a tax court judge for 15 years. One would think she, of all people, would know better than to cheat on her taxes. If she and her husband did do the alleged acts: Did they get bad tax advice? Did the couple believe they were above the law because of Kroupa’s position as a tax court judge? Whatever the reason for the alleged bad acts, if the allegations are proven true, it is likely that greed led to the couple’s ruin.

The “Stud Stud” Saga

This greed-based tax fraud is more common than one might think. Another example comes to mind:

Quite a few years back, I met a friend of a friend at a party I was attending. The chance meeting with this person reminded me of how common overly aggressive tax strategies are.

The fellow owned a framing company (roughed-in framing of structures) back in the heyday of home construction. He light-heartedly called himself the “Stud Stud.” Oddly, after so many years, I couldn’t tell you his real name.

Stud Stud had a beer or two during the party and that loosened him up a bit. Once adequately primed, he decided to share an unfortunate part of his tax strategy with the group.

Here is how his story unfolded: During the construction frenzy, he was making money hand over fist. Flush with cash, he had recently purchased a brand new Chevy Tahoe with all of the bells and whistles. It was a very nice one.

While showing us his nice wheels, Stud Stud mentioned that he deducts every mile he put on it as a business expense. Even family camping trips, trips to the grocery store, everything.  According to him, that was over 25,000 miles a year. He proudly said that by doing that, his new Tahoe pays for itself.

Based on Stud Stud’s proclamation, it was obvious to most who were listening that he was taking personal miles and calling them business miles for tax purposes. Not being shy, I shared my thoughts on that. I mentioned that it was a bad plan. I suggested that by doing so, he was putting up a huge audit red flag and suggested that he stop. He laughed me off and immediately sought better company.

I ran into our mutual friend and asked about Stud Stud. The friend told me that poor Stud Stud had been audited and was forced to pay back taxes, plus penalties, plus interest. His construction framing company was gone. His marriage had ended. Sad stuff.

The Idiom

It is advisable to carefully and aggressively plan our tax strategies. However, when we do put together such a plan, we need to do so within the boundaries of the law. It is appropriate to take advantage of the benefit of good solid tax advice. A quality advisor is a must.

It is a good idea to try to learn from the mistakes of others. The above stories remind us to fight any temptation to cheat on our taxes by falsifying our deductions. I am sure the judge and Stud Stud would both concur.

When in doubt… always remember the idiom: Pigs get fat … Hogs get slaughtered.