Don't Mess With Taxes

Diane L. Kroupa was appointed as judge to the U.S. Tax Court in June 2013. Her term was supposed to have run for 15 years, but in June 2014 she retired early.

This week Kroupa, 60, was indicted on two counts each of tax evasion, filing false returns and obstruction of an IRS audit. Her husband, Robert E. Fackler, 62, also was indicted on the same six tax-related charges.

The couple is accused of understating their income by approximately $1 million on tax filings for the 2004 through 2010 tax years. Much of that too-low amount was arrived at by allegedly claiming illegal business deductions in connections with Fackler's consulting business.

At the time of all of the alleged tax crimes, Kroupa was on the U.S. Tax Court bench in Washington, D.C.

"As a former tax court judge, Kroupa dealt regularly with individuals who cheated on their taxes, which makes these allegations particularly troubling," said Chief Richard Weber of the IRS-Criminal Investigation Division in a statement on April 4 announcing the indictments. "Reporting personal expenses as business expenses on your tax returns is not tolerated, regardless of your job or position. We expect all taxpayers to follow the law -- whether you are a business owner, individual, or government official -- we all must play by the same rules and pay our fair share."

"The allegations in this indictment are deeply disturbing," said U.S. Attorney Andrew Luger in the same statement. "The tax laws of this country apply to everyone, and those of us appointed to federal positions must hold ourselves to an even higher standard."

Tax practitioners and attorneys called the indictment troubling. "It's unprecedented. I have never seen anything like it," John M. Colvin of Colvin & Hallett told Tax Notes.

But, being good attorneys, they noted that the charges are just that, allegations of tax crimes.

"...defeating the lawful functions" of the IRS: As for the specific charges, the official legalese from the 22-page indictment alleges that Kroupa and Fackler "on or before 2004 and continuing at least through in or about 2012" Kroupa and Fackler did:

"unlawfully, knowingly, voluntarily, and intentionally combine, conspire, confederate, and agree with each other to defraud the United States for the purpose of impeding, impairing, obstructing, and defeating the lawful functions of the Internal Revenue Service of the United States Department of the Treasury in the ascertainment, computation, assessment, and collection of revenue, particularly by impairing and obstructing the ascertainment and computation of taxes."

In addition, the couple is accused of falsely reporting certain personal expenses as business deductions in connection with Grassroots Consulting, Fackler's lobbying and political consulting business.

Those allegedly fraudulent claims from 2004 through 2010 totaled at least $500,000 of personal expenses as purported Schedule C business expenses.

Long list allegedly illegal expense claims: The personal expenses that the Department of Justice has accused the couple of illegally claiming include in part:

Pilates classes; spa and massage fees; jewelry and personal clothing; dry cleaning and laundry; wine club fees and purchases at wineries; personal cellular telephone charges; Chinese tutoring; music lessons; personal computers; family and graduation photos; Christmas cards; Household items; and groceries.

In addition, the indictment charges that Kroupa and Fackler also illegally claimed airfare, hotel and other expenses for vacations to, among other locations, Alaska, Australia, the Bahamas, China, England, Greece, Hawaii, Mexico and Thailand.

And during two Internal Revenue Service audits of their returns, Kroupa and Fackler also alleged presented false and misleading information to the examining agents.

Kroupa and Fackler, who live in Minnesota, are expected to appear later this week in U.S. District Court in Minneapolis.

Separating business and personal: Kroupa and Fackler allegedly made a fundamental business tax mistake. They are accused of mixing business and pleasure.

This happens a lot. Sometimes it's done knowingly. Other times, business owners just get sloppy.

Either way, you could end up in big tax trouble.

Here are some previous posts that offer guidance on money-saving and legal business tax breaks. Several also offer advice on ways to keeping your business and home life separate. 

• The importance of good, and separate, business records
• 5 ways to maximize tax-deductible business entertainment
• Profit motive is critical to sustain business tax deduction claims
• Tax considerations of combining business, personal travel
• Be tax smart in combining business and personal travel
• Writing off business use of your cell phone on your taxes
• Tax record keeping song and dance
• What are ordinary & necessary business expenses? It depends
• Tax tips for the self-employed small business owner
• Attending SXSW for business? Keep careful track of your tax deductible expenses
• Which business mileage deduction, actual or standard, will cut your taxes more?

Conducting your business in a tax smart and legal way not only makes the IRS happier, the separation will help you more easily have some semblance of life outside of work.