March 5, 2013

Top 10 Tax Cheats: the Big, the Bad & the Weird

From infamous Al Capone to our top choice (you won’t believe what job he held before his conviction), these 10 learned the lesson the hard way

It’s tempting to try to get away with paying less income tax. A shady deduction here or there won’t be noticed, right? You might want to consider the fate of some celebrities and businessmen who were nabbed by the IRS.

They all had millions but were tripped up by trying to keep more than their share under the law. And saving a little in taxes up front cost each of them more in the end.

In the end, penalties and interest add up, making the original tax bill seem cheap in comparison. And for the worst offenders, there’s a stint in prison to endure. From Al Capone infamy to our top choice (you won’t believe what job he held before his conviction), these 10 learned the lesson the hard way—and some learned it repeatedly. We've listed them in order from lowest to highest amount of taxes avoided.

(Check out AdvisorOne’s special report home page: 20 Days of Tax Planning Advice for 2013.)

OJ Simpson speaking at his armed robbery trial in 2008. (Photo: AP)10. O.J. Simpson

(Amount Evaded: $515,000; $555,000 today)

There weren’t many people who were more recognized or beloved by sports fans in the 1970s than Orenthal James Simpson. He leveraged his football stardom and movie-star good looks into a career as commercial pitchman (think of him dashing through airports for Hertz) and in movies and TV shows like “The Naked Gun: From the Files of Police Squad!,” “Roots” and “The Cassandra Crossing.” It all went horribly wrong when he was charged with the murders of his former wife and Ronald Goldman. He was, of course, acquitted of those crimes.

But Simpson ended up being imprisoned in a separate, bizarre scheme involving his claim of trying to retrieve property he says was his. He was convicted of armed robbery and kidnapping and sentenced to 33 years in prison. If that wasn’t enough, the IRS this year put a $515,000 lien on Simpson for failure to pay taxes. That was the third such lien placed on Simpson in a year. The liens covers taxes owed to California and the U.S. for the years 2007-11.

Pete Rose in 2011. (Photo: AP)9. Pete Rose 
(Amount Evaded: $1.2 million; $1.5 million today)

The troubles of baseball’s all-time hits leader have been well chronicled. His lifetime ban for betting on the sport has kept him out of the Hall of Fame despite his on-the-field credentials. On top of that, he has had the tax man (or men, in this case) after him. In 1990, Rose served five months in prison for tax evasion. In 1998, California sought payment of $151,000 for taxes owed on his home in Sherman Oaks. He paid that debt off in 2003. The next year, the IRS filed a lien against Rose for $973,000 in taxes owed for 1997-2002. The hit king managed to pay that off in 2011.

That didn’t mean he was free and clear of tax woes. Last April, the IRS filed documents seeking payment of $120,000 in taxes for 2009 and 2010.

Leona Helmsley leaving court in 1990. (Photo: AP)8. Leona Helmsley 
(Amount Evaded: $1.2 million; $2.4 million today)

Before her epic fall, Leona Helmsley might have been remembered for the luxury hotel chain she built after marrying Harry, a real estate tycoon who appointed her president of the 30 or so hotels. She was known for her star turn in commercials for the chain, the queen of the perfect lodgings. But fall she did, becoming a punch line for New York tabloid editors and comedians while earning the nickname “Queen of Mean.”

What did she do to merit that sobriquet? She avoided paying $1.2 million ($2.2 million today) in taxes by paying for renovations on her Greenwich, Conn., home from corporate accounts. At her spectacular 1989 trial on 235 counts of tax evasion, workers at her home testified to her nasty demeanor and her failure to pay contractors. One worker famously testified that Helmsley had uttered this infamous sentence: “We don’t pay taxes, only the little people pay taxes.” Helmsley may have avoided taxes, but she couldn’t avoid prison and a $7.1 million ($13 million today) fine.

She stayed wealthy, though, selling her husband’s business after Harry (who was not tried because of medical incompetency) died in 1997 and much of her real estate at the height of the market in 1998. She died in 2007, leaving $12 million to her dog.

Al Capone (center) at his tax trial in 1931. (Photo: AP)7. Al Capone
(Amount Evaded: $215,000; $2.9 million today)

The king of Chicago’s gang wars of the 1920s was old Scarface himself. A hero to some who benefited from his bootlegging during Prohibition and his charity when the Great Depression hit, Capone was a ruthless gangster who maintained his grip on power with liberal use of the Tommy gun, best reflected in the St. Valentines’ Day Massacre of 1929. Despite the notoriety Capone’s acts garnered, the government was never able to make a case against him stick.

That is, until he faced tax evasion charges for the years 1925-'29. Accused of evading payment of $215,000 (about $2.9 million today) in back taxes, Capone in 1931 received 11 years in prison, more than twice the longest tax fraud sentence ever handed down.

For Scarface, his six-year reign of terror was over. Poor health caused by the ravages of syphilis and other problems led to his release from prison in 1939. Capone lived out his life in a state of diminished mental capacity, finally dying in 1947. And the conviction had a larger effect: income tax payments doubled over the two years following Capone’s conviction.

Dennis Kozlowski arriving at court in 2002. (Photo: AP)6. Dennis Kozlowski
(Amount Evaded: $8.3 million; $9.79 million today)

When we think of tax evasion, income taxes are what first come to mind. Dennis Kozlowski, the CEO of Tyco, took a different tack when avoiding giving the government its due: he skipped paying sales tax in New York state. That might not seem like a big deal, but all those pennies add up when you are buying artworks by master painters like Monet and Renoir. Add up they did, to the tune of $8.3 million in back taxes, but $21 million including city and state penalties, according to settlement reached in the case in 2006. That was a year after Kozlowski and other executives of the company had been convicted of stealing more than $600 million from Tyco.

Including restitution and fines in the Tyco case, the disgraced exec paid about $250 million for his misdeeds. He is currently serving a prison term of 8 1/3 to 25 years. Tyco, for its part, weathered the storm and split itself up, with the namesake company concentrating on its legacy fire protection and electronic security business lines.

Willie Nelson promoting Farm Aid in 1995. (Photo: AP)5. Willie Nelson 
(Amount Evaded: $6.5 million; $18.1 million today)

Willie Nelson relished his persona as a country music outlaw. And why not? Over the years he had raked in millions for his songs and recordings. But in 1990, the IRS came calling, wondering why the singer hadn’t filed any tax returns from 1978 to '82. The IRS filed a lien of $16.2 million to cover the $6.5 million in back taxes, plus penalties and interest it sought. Nelson didn’t have the money. His accounts were frozen and his assets seized. Nelson caught at least one break when his fans and friends purchased many of the confiscated assets at auction and returned them to the singer.

To pay his debt, Nelson cut an album, “The IRS Tapes: Who’ll Buy My Memories?” The royalties didn’t cover the bill. A lawsuit filed by Nelson against Price Waterhouse over financial mismanagement was settled for an undisclosed sum. Nelson paid off all his debts by 1993.

Wesley Snipes after his tax evasion conviction in 2008. (Photo: AP)4. Wesley Snipes 
(Amount Evaded: $15 million; $20 million today)

Wesley Snipes has made a lot headlines during his acting career. First, as star of popular movies like the “Blade” trilogy, “White Men Can’t Jump” and action pictures like “Passenger 57.” He’s earned millions in his career. All that money didn’t stop him from running afoul of the IRS. Snipes was charged with evading $15 million in taxes from 1999 to 2001. Although he was acquitted of felony charges, a jury found the actor guilty of three misdemeanor counts of failure to file a tax return.

Before he was sentenced, prosecutors argued for the maximum three-year sentence. They told the judge that Snipes was a longtime tax protester who relied on discredited arguments, like the IRS is not an accredited agency of the government and taxes are only owed on money earned from foreign companies. In the end, Snipes was sentenced to three one-year terms in federal prison, to be served consecutively. After exhausting his appeals (the Supreme Court refused to hear the case), Snipes began serving his sentence in July 2010.

The mysterious Walter Anderson.3. Walter Anderson
(Amount Evaded: $200 million; $310 million today)

Walter Anderson was an entrepreneur who made headlines by backing an effort to privatize the Mir space station. He had struck it rich in the 1990s with his foray into the long-distance telecom business through his Mid-Atlantic Telecom company. He had the right idea at the right time. According to the Justice Department, that’s where Anderson’s problems began.

In 2005, he was arrested and charged with evading more than $200 million in income taxes by hiding in personal income earned from 1992 to '96. He was charged with funneling the money through an offshore corporation he secretly controlled.

Anderson pled guilty in 2006 and was given nine years in prison in what has been called the largest personal tax fraud in U.S. history. He was also ordered to pay the government tens of millions of dollars in back taxes, penalties and restitution, although he contended he was broke. He was released on Dec. 28, 2012, having served about seven years counting his time in the Washington, D.C., jail while awaiting trial. Anderson maintains his innocence and vows that one day his name will be cleared.

John Gotti in court in 1990. (Photo: AP)2. John Gotti
(Untold mob millions)

Nicknamed the “Teflon Don” for his ability to avoid being convicted during three racketeering trials, the “reputed” head of the Gambino crime family couldn’t evade justice in 1992. What finally tripped him up were hours of secret recordings, 38 witnesses (including a top mob cohort, Sammy “The Bull” Gravano) and his failure to file tax returns for several years. Gotti’s lone defense witness was a lawyer who said he advised the crime boss that not filing returns was legal, despite the Gambinos’ estimated annual revenue of $500 million ($880 million today). In 1992, Gotti was convicted of all 13 counts against him.

He died of throat cancer in prison in 2002. His conviction is widely seen as spelling the end of crime families’ control of the New York City rackets.

Joseph Nunan Jr., IRS commissioner. (Photo: AP)1. Joseph Nunan Jr.
(Amount Evaded: $90,000; $860,000 today)

Never heard of Joe Nunan? His name may have faded into history, but to our way of thinking he’s our top tax scofflaw of all time, despite the fact that the amount he avoided paying was paltry compared to many on the list.

Nunan, you see, was the commissioner of the IRS from 1944 to 1947. Somehow, that experience didn’t stop him from evading paying income taxes from 1946-50 on $90,000 ($860,000 today). The unreported earnings were all from gambling winnings, according to an Associated Press article in 1998, including $1,800 Nunan pocketed when he backed Harry Truman to defeat Thomas Dewey in 1948 at 9-to-1 odds. He was convicted in 1954 and fined $15,000 and sentenced to five years in prison, one of the stiffest penalties handed down in a tax evasion case to that time, according to contemporary news accounts.

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