All this talk about IRS investigations brings to mind the most notorious tax evasion case of all time: the conviction of legendary gangster Al Capone.
The Chicago mobster, reputed to have ordered hundreds of hits, was felled in 1931 not by traditional lawmen or criminal rivals, but by the tax man. And now the IRS has released some of its records from that historic case.
As it was complying with a Freedom of Information Act request for a copy of Special Agent Frank Wilson's report on the 1931 case, the IRS discovered additional documents related to the three-year Capone investigation. And it decided to give them not only to the FOIA requester, but to everyone.
"All Federal tax records are confidential by law," noted IRS officials in announcing the decision to release the new-found material. "However, the records of the criminal investigation of Al Capone … are of historical significance and of interest to the public. Therefore, they are being made available…. No other IRS records meet the unique set of circumstances that make the Capone records publicly available."
Also helping nudge the IRS toward revealing the Capone material was the fact that the former Public Enemy Number One never filed a tax return. So technically, there was no tax record that the IRS was required by law to keep confidential.
Extra, extra! Read all about it: Among the now-public material are copies of reports and letters from the actual file which summarize the events and activities of the three year investigation of Capone. They include:
- A July 8, 1931, letter from Internal Revenue Agents to the Chicago-based Internal Revenue Agent in charge.
- A summary report dated Dec. 21, 1933, prepared by Special Agent Frank J. Wilson.
- A March 27, 1931, letter from Wilson updating the status of the Capone investigation.
- Another investigation update letter from Wilson dated April 8, 1931.
- An excerpt referencing Al Capone from "A Narrative Briefly Descriptive of the Period 1919 to 1936." This was a report prepared on the organization, functions and activities during that time period by Elmer Irey, Chief, Intelligence Unit.
On the Sunday version of NBC's Today Show, Capone's great-niece spoke about life with her infamous uncle. You can watch the video here.
If you prefer a little more drama with your Capone documents, I recommend The Untouchables. The 1987 film starred Kevin Costner as G-man Eliot Ness and Sean Connery as Chicago police lieutenant Jim Malone. But the real hero was Charles Martin Smith, whose IRS agent character realized that the government could nail Capone for tax evasion.
Living too large alerts the auditor: The IRS wanted to know how come Capone's lavish spending habits didn't match with his reported income, which was none. And since even illegal income is taxable, Capone was brought down by the IRS.
That investigative tactic is still being used today by the IRS. It's known financial status audit, or more popularly as a lifestyle audit.
Those average deduction numbers, or DIF, discussed in previous blogs (here and here) come into play in a lifestyle audit. But it's much more than that. Essentially, the IRS wants to know how come you're driving a Mercedes and have a Miami Beach winter getaway on reported income of only $50,000.
When it encounters such seeming gaps, the IRS tends to suspect that off-the-books cash is involved, and its auditors are charged with finding it and collecting the due tax.
If you're audited by the IRS and you find the session turning a bit personal -- the examiner asks questions like just how much square footage is your house, where did you go on your last vacation or what school do your kids attend -- then a lifestyle audit is underway. Essentially, the agent is trying to unearth any inconsistencies between how you live and your reported income.
That's why experts say never meet an auditor at your home, where agent observations and chitchat could lead to questions about how you could afford all those original artworks adorning your walls.
In fact, don't talk to an auditor at all. Leave that to your CPA, tax attorney or enrolled agent, all of who are licensed to represent individuals before the IRS. If you use another type of tax pro, consider giving him or her legal power of attorney and tell the IRS to send that person all questions about your return.
Also, while under the tax code the burden of proof is on taxpayers, you can ask the IRS to show data that raises suspicions you're hiding income. On request, the IRS must release records gathered in an audit, except for reports from confidential informants.