Posts Tagged ‘TaxOffenderOfTheYear’

The 2019 Tax Offender of the Year

Tuesday, December 31st, 2019

This year really went by fast, but unfortunately there’s no shortage of candidates for the Tax Offender of the Year award. As a reminder, to be considered for the Tax Offender of the Year award, the individual (or organization) must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions.

The United States Congress received another nomination. The correspondent noted that Congress has abdicated looking at spending, and that’s been done by both Democrats and Republicans. I agree, but that’s not enough to win this year.

California received two separate nominations. The legislature received one for A.B. 5. That’s the new law that prohibits most independent contractors in the ‘gig’ economy. The law will likely lead to fewer independent contractors (that’s the intent of it), but won’t increase employment and will lead to a lowering of tax collections. I agree completely with the individual who sent in that nomination. However, any impacts will be in 2020 (not 2019), so I think this should be held in abeyance until next year.

The California Office of Tax Appeals ruled that an individual selling into California but with no presence in the state owes California tax. While I expect this ruling to eventually be narrowed by federal courts (potentially being completely overruled), it’s a stupid ruling and will lead to many avoiding dealing with Californians. It’s another penny-wise, pound-foolish outcome from California.

Craig Orrock of Salt Lake City received a nomination. Mr. Orrock is a former IRS employee and a former attorney. We’ll stress the word former because his conduct ensured he can’t be either ever again. From the Department of Justice press release:

Evidence at trial showed that Orrock filed tax returns for the years 1993 through 2015, but did not pay the income taxes reported as due on those returns. Orrock attempted to prevent the IRS from collecting the reported income taxes by using entities, bank accounts, and trusts in other names to hide his income and assets from IRS collection officers, filing frivolous bankruptcy petitions, and filing an offer-in-compromise falsely representing to the IRS that he had virtually no assets.  For example, Orrock used an entity known as Arville Properties LLC to conceal from the IRS his ownership of real property that he sold in 2007 for $1.5 million. In all, Orrock evaded the payment of over $500,000 in federal income taxes.

Mr. Orrock will be paying nearly $924,000 of restitution and will spend 32 months at ClubFed.


Something I’ve stated since I began this blog is that if you want to get in trouble with the IRS, one of the easiest ways to do so is to withhold employment taxes and not remit them. As far as I know, the IRS investigates all such cases.

Lawrence R. Gazdick, Jr. founded an equipment rental business in Dulles, Virginia (near Washington, DC). Mr. Gazdick’s business appeared to be successful, in that he had 70 – 100 employees. He used various names for his businesses (which isn’t an issue), with multiple bank accounts (52 in 9 different banks). He offered health insurance for his employees, with a plan from Kaiser Permanente which cost over $200,000. That’s a business that’s doing well.

Of course, since I’m writing about this, there were some issues. None of his businesses bothered filing employment tax returns, but he was diligent in withholding employment taxes from his employees’ pay. It was only $3.874 million of trust fund taxes (along with an additional $1.477 million of employer FICA taxes). Additionally, Mr. Gazdick didn’t bother to pay Kaiser for the health insurance; the check was “in the mail.”

Mr. Gazdick also didn’t file corporation or LLC taxes. It’s not clear if he needed to file Forms 1120, 1120S, or 1065 for his businesses as he held his businesses to be corporations and LLCs, but something needed to be filed. At least he was consistent: Mr. Gazdick hadn’t filed personal tax returns since at least 2000. (Some tax professional is about to get a lot of business.)

Mr. Gazdick’s business came to the attention of the IRS. This was certain to happen. Consider that employees filed their income tax returns, noting withholding of income tax (and FICA taxes). The IRS won’t find the matching payroll tax returns (Forms 941) from the employer. The IRS will easily get evidence of the problem (either by looking at the W-2s filed with the Social Security Administration and/or getting copies of pay stubs from employees).

Mr. Gazdick had an answer: I’ll just change the name of the business. He used multiple names, likely in trying to keep the IRS at bay. It didn’t work, but not for the obvious reason. (It’s certain that sooner or later the IRS would have looked into the missing payroll tax deposits.)

Mr. Gazdick was previously convicted of a felony. Convicted felons are not allowed to possess firearms. Mr. Gazdick had a firearm for his business. That came to the attention of a task force formed under “Project Safe Neighborhoods.” The goal of Project Safe Neighborhoods (which began in 2001) is reducing violent crime. The investigation likely began because of the gun. A helpful hint to anyone who is going to commit a felony with a high likelihood of investigation: Do not commit another felony which also has a high likelihood of investigation. But I digress….

It appears that the Project Safe Neighborhoods investigation led to the tax investigation. The tax case was pretty much a slam dunk given the facts (that I noted above). Mr. Gazdick has pled guilty, and has promised to make restitution of the $5.35 million in employment tax loss and the $200,000 which wasn’t paid to Kaiser. While sentencing was supposed to have occurred in October, it appears to have been delayed.


And that’s a wrap on 2019. I wish you and yours a happy, healthy, and prosperous New Year.

Nominations for the 2019 Tax Offender of the Year Are Due

Tuesday, December 10th, 2019

In a little less than a month it will be time to reveal this year’s winner of the prestigious “Tax Offender of the Year” award. Remember, To be considered for the Tax Offender of the Year award, the individual (or organization) must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Here are the past lucky recipients:

2018: California’s Train to Nowhere
2017: State and Local Pension Crisis
2016: Judge Diane Kroupa
2015: Kenneth Harycki
2014: Mauricio Warner
2013: U.S. Department of Justice
2012: Steven Martinez
2011: United States Congress
2010: Tony and Micaela Dutson
2009: Mark Anderson
2008: Robert Beale
2007: Gene Haas
2005: Sharon Lee Caulder

The 2018 Tax Offender of the Year

Monday, December 31st, 2018

Another year has gone by. And that means it’s once again time for that most prestigious of prestigious awards, the Tax Offender of the Year. As usual, there’s a plethora of nominees. As usual, I wish there weren’t any deserving winners.

The Tax Cuts and Jobs Act (TCJA) received a nomination. “This isn’t tax simplification, and few have received benefits,” a correspondent told me. The first part of the statement is absolutely true. The TCJA is anything but simplification. As for few receiving benefits, almost all the provisions of the TCJA impact 2018 taxes (and onward). We’ll have a much better idea of what this law will (or won’t) due to taxpayers in a few months. I’m holding this nomination in abeyance until next year.

The Miccosukee tribe of Indians received another nomination. The tribe has been fighting a losing battle over the taxation of profits from their casino in southern Florida. The tribe itself is exempt from taxation (it’s a sovereign nation); however, members of the tribe are not exempt based on distributions of those profits. This issue has been percolating up and down the Tax Court, District Courts, and the 11th Circuit Court of Appeals for a few years. On June 4th the 11th Circuit ruled in United States v Jim:

When an Indian tribe decides to distribute the revenue from gaming activities, however, the distributions are subject to federal taxation. Id. § 2710(b)(3)(D). The Indian tribe, as a consequence, must report the distributions, notify its members of their tax liability, and withhold the taxes due on them. Id. § 2710(b)(3)(D); 26 U.S.C. §§ 3402(r)(1), 6041(a).

In the case before us, an Indian tribe engaged in gaming activities. Each quarter, the tribe used the revenue of the gaming activities to fund per capita distributions to its members. But the tribe disregarded its tax obligations on these distributions. It neither reported the distributions nor withheld taxes on them…

In this appeal, the member and the tribe contend that the District Court erred in concluding that the exemption for Indian general welfare benefits did not apply to the distributions. The tribe alone asserts that the District Court erroneously upheld tax penalties against the member and incorrectly attributed to the member the distributions of her husband and daughters. Lastly, the tribe argues that the District Court erred by entering judgment against it as an intervenor.

We affirm the ruling of the District Court in each of these matters. The distribution payments cannot qualify as Indian general welfare benefits under [the Tribal General Welfare Exclusion Act] because Congress specifically subjected such distributions to federal taxation in [the Indian Gaming Regulatory Act]. The member has waived any arguments as to penalties or the amount assessed against her, and the tribe lacks a legal interest in those issues. The District Court did not err in entering judgment against the tribe because the tribe intervened as of right and the Government sought to establish its obligation to withhold taxes on the distributions. [footnote omitted]

This taxpayer owes $278,758.83 as of April 9, 2015; the tribe and its members could owe more than $1 billion in personal income taxes. Yet that sum pales in comparison to our ‘winner.’


As most of you know, I grew up just outside of Chicago. I have fond memories of riding the El and of taking the train up to Milwaukee. Subways and other forms of mass transit work well in dense cities such as Chicago, New York, and Boston.

Amtrak, however, has been a money loser. Running passenger trains through the northeast corridor ekes out a profit, but the rest of the service doesn’t make money. Put simply, you need a dense corridor to make trains a winner.

In November 2008, California voters passed Proposition 1A. As noted in the ballot summary, “Provides for a bond issue of $9.95 billion to establish high-speed train service linking Southern California counties, the Sacramento/San Joaquin Valley, and the San Francisco Bay Area.” The argument in favor stated:

Proposition 1A is a $9.95 billion bond measure for an 800-mile High-Speed Train network that will relieve 70 million passenger trips a year that now clog California’s highways and airports—WITHOUT RAISING TAXES…

Proposition 1A will save time and money. Travel from Los Angeles to San Francisco in about 2½ hours for about $50 a person. With gasoline prices today, a driver of a 20-miles-per-gallon car would spend about $87 and six hours on such a trip.

The rebuttal to the argument stated:

Prop. 1A is a boondoggle that will cost taxpayers at least $20 billion in principal and interest. The whole project could cost $90 billion—the most expensive railroad in history. No one really knows how much this will ultimately cost.

Now that we’re ten years after passage, we can determine that both sides were wrong. The last official analysis showed a price tag of $77 billion. The New York Times, in an article this past July, upped the price to $100 billion. So both sides were wrong about the cost, but the opponents had the right idea. And with this project years from completion and the cost having risen every time there’s been a new analysis, I’ll take the over on $100 billion. That’s why California’s high speed rail project (aka “The Train to Nowhere”) is this year’s Tax Offender of the Year.

So where will the money come from to build the train? It’s not coming from this Congress; President Trump and Republicans in Congress vociferously oppose the project. Proposition 1A says that the train must be self-supporting; less than 3% of high-speed train networks in the world are self-supporting. Authority Spokeswoman Lisa Marie Alley told the Sacramento Bee “We haven’t been shy about the fact that this project was never fully funded.” The hope is that once the system begins to operate that it will show private industry its usefulness and that they would be willing to invest in the project.

Consider that the first segment will run from Shafter, just north of Bakersfield, to Madera, a bit south of Merced. It does go through the San Joaquin Valley’s largest city, Fresno, but it does not run through Visalia; instead, it runs near Hanford. I’ll be blunt: There’s no chance that the first segment will be self-supporting. There aren’t enough riders wanting to commute between these cities to make the line profitable. Additionally, state route 99 runs between all these cities. Yes, it will take longer in a car but you have your own transportation when you get to your destination, and you don’t have to wait for the train.

Where high speed rail works is in dense corridors. For example, the Japanese bullet trains run between such cities as Tokyo (population 38 million for the metropolitan area), Osaka (19 million), and Nagoya (9 million). The California bullet trains will initially run between Shafter (population 19,608) and Madera (population 65,508). If we use Bakersfield (840,000 for the metropolitan area) and Fresno (972,000) we get something a little better. Still, how many people really commute between these cities? Having lived in Visalia for years, I can state unequivocally it’s not a lot.

Proponents argue that once the train reaches the Bay Area and Southern California, ridership will pick up; both metropolitan areas have millions of residents. But there’s a huge difference between Tokyo and either California metropolitan area. The Tokyo metropolitan area is 5,240 square miles with a population of 38 million. The Los Angeles metropolitan area is 33,954 square miles with a population of 18.7 million. The Bay Area is 10,191 square miles with a population of 7.77 million. Put simply, Japan is densely populated so train travel works very well.

Additionally, there are several airports serving both the Los Angeles metropolitan area (Los Angeles International, Burbank, Ontario, Long Beach, and Orange County) and the Bay Area (San Francisco, San Jose, and Oakland). There are numerous flights between each of the Southern and Northern California airports. These flights take about one hour and cost about $100. High speed rail is going to have to beat that in some way in order to attract paying customers. Frankly, I doubt either will happen.

If the system is built, I do think that it will attract riders going to and from the Central Valley. There aren’t many flights to Fresno from the Bay Area (or from Los Angeles). There’s also the issue of demand; there really isn’t that much into the Valley. But the service can certainly attract riders there. However, it’s not going to be near enough riders for the project to pay for itself.

The problem for California taxpayers is that they are liable for the project. Those bonds will need to be paid back. There’s a need for at least another $70 billion to finish the line. The best estimate for the annual subsidy is $100 million. Yes, I know that Proposition 1A specified that there can’t be a subsidy. Does anyone really believe that California’s politicians will follow the law on this? (Hint: I don’t.)

But Russ, this is a state project. Its impact is limited to California. If California wants to shoot itself in the foot, we should let it. The problem with that argument is that the next time the California economy suffers a downturn, California will run to Congress for a bail-out. Today, the Trump Administration is likely to tell California, “No.” However, I have my doubts that a future Democratic administration won’t go for a bail-out on this project, leaving non-Californians liable for this boondoggle. There’s a need for $70 billion. The sooner that this project is put out of its misery the better for both California and the country.

Quentin Kopp, a former Supervisor in San Francisco, was the man who introduced the project and was a proponent. He told reason.com

It is foolish, and it is almost a crime to sell bonds and encumber the taxpayers of California at a time when this is no longer high-speed rail. And the litigation, which is pending, will result, I am confident, in the termination of the High-Speed Rail Authority’s deceiving plan…

[The selling of bonds is] deceit. That’s not a milestone, it’s desperation, because High-Speed Rail Authority is out of money.

California High Speed Rail is a worthy winner of the 2018 Tax Offender of the Year award.


That’s a wrap on 2018. I wish you and yours a happy, healthy, and prosperous New Year!

Nominations Due for Tax Offender of the Year

Wednesday, December 12th, 2018

In a little less than a month it will be time to reveal this year’s winner of the prestigious “Tax Offender of the Year” award. Remember, To be considered for the Tax Offender of the Year award, the individual (or organization) must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Here are the past lucky recipients:

2017: State and Local Pension Crisis

2016: Judge Diane Kroupa
2015: Kenneth Harycki
2014: Mauricio Warner
2013: U.S. Department of Justice
2012: Steven Martinez
2011: United States Congress
2010: Tony and Micaela Dutson
2009: Mark Anderson
2008: Robert Beale
2007: Gene Haas
2005: Sharon Lee Caulder

The 2017 Tax Offender of the Year

Sunday, December 31st, 2017

It’s once again time for that most prestigious of prestigious awards, the Tax Offender of the Year. To win this award you need to do more than cheat on your taxes; it has to be a Bozo-like action or actions. As usual, we had plenty of nominees.

President Trump received a nomination. Now, I realize many do not like the President’s politics, and the tax reform bill that was signed into law isn’t tax simplification. However, it is tax reform, and it will lower taxes for most Americans. As for Democrats’ charges that it will kill millions and cause the world to end, please. President Trump may deserve criticism over other political issues, but not on taxes (today).

Finishing in third place was Joseph Cervone, CPA, of White Plains, New York. Mr. Cervone saw the tax credits available for energy and coal and thought, “I can get free money for my clients! Let’s just submit $23 million of phony credits!” Mr. Cervone is enjoying 22 months at ClubFed.

Finishing in second place was the California legislature. The Bronze Golden State had a flirting with single-payer health care; luckily for California taxpayers the projected $400 Billion cost caused even the ultra-liberals to get cold feet. California continues to waste money on the train to nowhere. The project originally had a cost of $33 billion; it’s now up to $68 billion. It’s probable, though, that the project will die as further funding from the federal government is unlikely. It would be nice for Sacramento to stop spending money on it; the $3 billion spent could be used for far better things.


I grew up just outside of Chicago. I’m a fan of Chicago sports teams (save the White Sox), and many of my relatives live in or near Chicago. Yet Illinois in general and Chicago in particular is now known for high and increasing taxes and out-migration. A search on Chicago taxes finds stories like, “Chicago Property Tax Bills Going up 10 Percent This Year,” “Increased taxes, fees on phones, ride-hailing and concert tickets approved in 2018 Chicago budget,” and “Chicago’s soda tax is repealed.” You can read an article about fed-up Illinois homeowners debating moving from Chicago.

The question, though, is why are taxes increasing in Illinois and Chicago? Is it just the politicians, or is there an underlying cause? There is an answer: Public Employee Pension Funds. These funds (generally on the state level) are the cause of the problem in Illinois, and are this year’s Tax Offender of the Year.

The Tax Foundation has a map showing the funding in various states. Here are the top ten (best) funded states as of 2015 (latest year that statistics are available):

1. South Dakota, 107%
2. Oregon, 104%
3. Wisconsin, 103%
4. North Carolina, 99%
4 (tie). Tennessee, 99%
6. New York, 98%
7. Idaho, 95%
8. Nebraska, 93%
9. Delaware, 92%
10. Florida, 91%

And here are the ten worst:

40. Arizona, 64%
40 (tie). Colorado, 64%
42. Hawaii, 61%
42 (tie). Rhode Island, 61%
42 (tie). South Carolina, 61%
45. Alaska, 60%
45 (tie) Pennsylvania, 60%
47. Connecticut, 51%
48. New Jersey, 48%
49. Illinois, 41%
49 (tie) Kentucky, 41%

The Tax Foundation’s closing paragraph explains the problem:

Pension obligations must be fulfilled eventually. Policymakers should consider that reform now may be less costly and less painful than coping with a larger crisis later.

As of 2015, both California and Nevada are about average (at 74% funded). Unfortunately, California is now at 64% and falling. So why has this happened and what can be done about it?

Pew has a report on the 2015 analysis, and the problems began in the early 2000s: Liabilities increased at the same basic rate while assets in pension funds didn’t. In many states the pension fund crisis hasn’t come (yet). In a few, it won’t come (pensions are properly funded). In at least one state, Illinois, the crisis exists today; in another, California, it’s coming very soon. Consider that California pensions aren’t well funded yet we’ve had a huge boon in the stock market over the last two years!

Some cities and counties are in even worse shape. A Hoover Institution report shows that both Chicago and Cook County (the county that Chicago is in) have massively underfunded pensions. So Chicago residents have a triple whammy: underfunded state, county, and city pensions.

As for the reasons why this crisis exists, there are a couple.

1. When rates of return increased in the late 1990s, that increase was built into new public employee contracts. The late 1990s featured the dot-com boom in the stock market. Those rates of returns, in the 7% range, aren’t seen today (they’re about 2% to 3%).

2. Politicians ignoring the issue. It’s always easiest to pass the buck to the next mayor, or the next governor, or the next state legislature. That’s what’s been done in Illinois, and the state is in severe crisis. The Democrats who control the state legislature are beholden to the public employee unions who, shockingly, don’t want to see pensions cut. Last time I looked, Illinois is nearly a year behind in paying its bills–all because of the pension crisis. So Democrats are only proposing tax increases rather. Residents who can move are doing so, and they can escape the pension crisis.

So what’s the answer to this crisis? There are a couple:

1. Pension reform is needed nearly everywhere in the US. Yes, pension benefits are going to decrease. That’s going to happen, either through negotiation or when the systems run out of money. It’s a certainty.

2. Reform for civil service/public employee unions. I am reminded of what President Franklin Roosevelt said:

All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations when applied to public personnel management. The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations. The employer is the whole people, who speak by means of laws enacted by their representatives in Congress. Accordingly, administrative officials and employees alike are governed and guided, and in many instances restricted, by laws which establish policies, procedures, or rules in personnel matters.

Meaningful reform means that public employee unions won’t have collective bargaining or massive reform of civil service (or both). Governor Scott Walker of Wisconsin noted this in a speech and implemented reforms. You will note that Wisconsin pensions are fully funded (one of only three such states).

Pain is coming in the world of pensions. Public employee unions can either recognize it, and live with change, or it will be forced upon them. Taxpayers stuck in bad states (e.g. Illinois) and bad cities (e.g. Chicago) will vote with their feet. Chicago politicians can’t tax John and Mary Smith who leave Chicago for places like Florida. Politicians also need to recognize reform is mandatory. Yes, it will be painful but the cost of kicking this can further down the road is even greater.


That’s a wrap on 2017. While I hope that 2018 will not provide me a lengthy list of candidates for Tax Offender of the Year, I suspect (as usual) that I’ll have plenty of choices.

I wish you and yours a happy, healthy, and prosperous New Year!

Nominations Due for 2017 Tax Offender of the Year

Wednesday, December 6th, 2017

In a little less than a month it will be time to reveal this year’s winner of the prestigious “Tax Offender of the Year” award. Remember, To be considered for the Tax Offender of the Year award, the individual (or organization) must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Here are the past lucky recipients:

2016: Judge Diane Kroupa
2015: Kenneth Harycki
2014: Mauricio Warner
2013: U.S. Department of Justice
2012: Steven Martinez
2011: United States Congress
2010: Tony and Micaela Dutson
2009: Mark Anderson
2008: Robert Beale
2007: Gene Haas
2005: Sharon Lee Caulder

2016 Tax Offender of the Year Gets 34 Months at ClubFed

Sunday, June 25th, 2017

Last April, a husband and wife from Minnesota were indicted on tax evasion charges. There wasn’t anything unusual about what they allegedly did; besides lying to their tax professional and the IRS they deducted personal expenses as business expenses. The reason Diane Kroupa won the award was her profession: She was a judge on the United States Tax Court. She knew better.

Last week Ms. Kroupa received 34 months at ClubFed; her husband received 24 months. Acting United States Attorney Gregory Brooker said,

Over a nearly ten-year period, the defendants engaged in a deliberate and brazen tax fraud scheme…Considering Ms. Kroupa’s position of public trust as a US Tax Court Judge, her crime is particularly egregious. Ms. Kroupa used her knowledge of the tax laws to further their fraud scheme, conceal their criminal conduct and maintain their acquisitive lifestyle. The sentences handed down today show that no one is above the law.

There’s not much to add to that statement.

The 2016 Tax Offender of the Year

Tuesday, December 27th, 2016

Every year I hope that I won’t find any deserving individuals of the Tax Offender of the Year Award. To win this award, you need to do more than cheat on your taxes; it has to be a Bozo-like action or actions. As usual, we had plenty of nominees.

Coming in third this year is the Internal Revenue Service. What did the IRS do to deserve this award? Well, we have the IRS Scandal; it’s still unresolved. If we were to believe the IRS nothing untoward happened! I’m sure that’s why Commissioner Koskinen faced an impeachment resolution. And remember the data breaches? It wasn’t 104,000 people who were victimized back in 2015 (the “Get Transcript Hack) nor was it 334,000 taxpayers. There were over 700,000 people impacted (and over 500,000 unsuccessful attempts)! As Joe Kristan says, “The IRS: Protecting your identity since 1913.” Or not.

Coming in second place this year is the Miccosukee tribe of Indians in Florida. They’ve been fighting in both US District Court and US Tax Court that income to members of the tribe from a casino isn’t taxable. To date, they’ve lost every single case. Most recently, in August US District Judge Ceclilia Altonaga ruled that a tribal member must pay nearly $279,000 in taxes, penalties, and interest stemming from not filing a 2001 tax return. The Tax Court cases have been inching along; most recently, the Tax Court ruled that a trial will be held and that the tribe cannot subpoena witnesses from the Department of the Interior to interpret statutes (the judges will do that). In March, the tribe lost an appeal that they were immune from US taxes. (The lawsuit alleged that the US had waived sovereign immunity for the tribe. The lawsuit was dismissed in US District Court; the tribe appealed and lost that appeal.)


A husband and wife from Minnesota were indicted in April on tax evasion charges. The charges, detailed in the indictment, are very typical tax charges. The couple were alleged to have fraudulently claimed personal expenses as business expenses, including rent, utilities, garbage removal, household cleaning, remodeling windows, interior design fees, a dishwasher, furniture to stage a house for sale, Pilates classes, jewelry, wine club fees, and grooming expenses. (There are more, but that’s a good range of the expenses they claimed on their returns.)

They were also alleged to have not reported income from a sale of land in South Dakota, and to have not reported canceled debt income. Adding to their troubles, they were alleged to have lied to an IRS Office Examiner during an audit of their 2004 and 2005 tax returns in 2006. It’s a very bad idea to lie to an IRS employee; that’s a felony. They then allegedly lied again during an audit of their 2009 and 2010 returns (in 2012). One would think they had learned but….

Of course, they allegedly lied to their tax professional regarding all of the returns, grossly understating their income. They ended up owing an additional $500,000 in taxes, penalties, and interest.

Unfortunately, this kind of tax crime (taking personal expenses as business expenses) is fairly common. Most individuals believe that they just won’t get caught. As the Tax Court has noted,

Taxpayers may deduct ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. The term “ordinary and necessary business expenses” means only those expenses that are ordinary and necessary and are directly attributable to the trade or business. The term does not include personal, living, or family expenses. Simply because an expense would not have been incurred but for the taxpayer’s engaging in a trade or business is insufficient to allow a deduction. The nature of the expense must not be personal or otherwise nondeductible.

There are many expenses that are helpful, even essential, to one’s business, but which are not deductible in our tax system. Expenses of driving to and from work, for example, are not deductible. Expenses for clothing worn in a taxpayer’s trade or business, and the costs of laundering the clothing, are not deductible if the clothing is adaptable for nonbusiness wear.

The judge who wrote that decision is Diane Kroupa. Ms. Kroupa was a US Tax Court judge from June 2003 until her resignation in June 2014. She’s also one of the two defendants in this case. Yes, a former Tax Court judge committed tax evasion. And that is why she is the 2016 Tax Offender of the Year.

When Judge Kroupa and her husband were indicted, my reaction was the same as Law Professor Dennis Ventry, Jr. of the UC Davis Law School:

Smart people do dumb things all the time but this is a head-scratcher. If you’re a high-level government employee, you side on saying ‘no’ to a deduction; you take the conservative approach.

I didn’t report on this case when the indictment was issued in early April (it was during the annual down-time for my blog). I had noticed the story, of course, but basically couldn’t believe it. However, both Robert Fackler (Judge Kroupa’s husband) and Judge Kroupa pleaded guilty.

In the plea examination, Judge Kroupa admitted her crime:

Q. And neither you nor Mr. Fackler told the tax preparer the amounts reflected in the information, spreadsheets, or tax organizers that you gave him included personal expenses that were disguised as business expenses?
A. No.
Q. That fact is true?
A. That fact is true, we did not provide that information.
Q. And by doing that, you thereby significantly and fraudulently increased Grassroots Consulting’s business expenses, which then reduced the amount of taxes that you jointly owed to the IRS?
A. Correct.
Q. And on page 4 and page 5 of this plea agreement there is a list of descriptions of specific expenses that were included supposedly as business expenses which were, in fact, personal expenses, correct?
A. Correct.
Q. You’ve looked at this list and either you know that these are ones that were included or else you have seen evidence to that effect?
A. Correct.
Q. So in total from 2004 through 2010 did you and Mr. Fackler fraudulently deduct at least 500,000 of personal expenses as purported Schedule C business expenses?
A. Yes.

Judge Kroupa certainly knew the law; her resume is quite impressive:

Judge. b. South Dakota. B.S.F.S. Georgetown University School of Foreign Service, 1978; J.D. University of South Dakota Law School, 1981. Prior to appointment to the Court, practiced tax law at Faegre & Benson, LLP in Minneapolis, MN. Minnesota Tax Court Judge from 1995 to 2001 and Chief Judge from 1998 to 2001. Attorney-advisor, Legislation and Regulations Division, Office of Chief Counsel and served as attorney-advisor to Judge Joel Gerber, United States Tax Court, 1984-1985. Admitted to practice law in South Dakota (1981), District of Columbia (1985) and Minnesota (1986). Member, American Bar Association (Tax Section), Minnesota State Bar Association (Tax Section), National Association of Women Judges (1995 to present), American Judicature Society (1995 to present). Distinguished Service Award Recipient (2001) Minnesota State Bar Association (Tax Section). Volunteer of the Year Award, Junior League of Minneapolis (1993) and Community Volunteer of the Year, Minnesota State Bar Association (1998). Appointed by President George W. Bush as Judge, United States Tax Court, on June 13, 2003, for a term ending June 12, 2018.

Unfortunately, we must add, “Pleaded guilty to tax charges (2016)” to that list.

Judge Kroupa’s actions—a former Tax Court judge committing tax evasion—make her a worthy recipient of the 2016 Tax Offender of the Year Award.


That’s a wrap on 2016! While I am hopeful 2017 will not provide me a lengthy list of candidates for Tax Offender of the Year, I suspect that I’ll have plenty of choices.

I wish you and yours a happy, healthy, and prosperous New Year!

Nominations Due for 2016 Tax Offender of the Year

Monday, December 5th, 2016

In a little less than a month it will be time to reveal this year’s winner of the prestigious “Tax Offender of the Year” award. Remember, To be considered for the Tax Offender of the Year award, the individual (or organization) must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Here are the past lucky recipients:

2015: Kenneth Harycki
2014: Mauricio Warner
2013: U.S. Department of Justice
2012: Steven Martinez
2011: United States Congress
2010: Tony and Micaela Dutson
2009: Mark Anderson
2008: Robert Beale
2007: Gene Haas
2005: Sharon Lee Caulder

2015 Tax Offender of the Year

Wednesday, December 30th, 2015

Once more it’s time to award that prestigious award, the 2015 Tax Offender of the Year. The winner of this award must do more than just cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Unfortunately, there were plenty of nominations.

Dissatisfied with only winning the Tax Offender of the Year award once, the US Congress made a strong push for the award. However, they snatched defeat from the jaws of victory (which is a good thing; this award really isn’t something to brag about). Just two weeks ago they passed both a budget and tax “extender” legislation, and even codified the Enrolled Agent profession as part of the legislation. That last item eliminated Congress from the running.

The Miccosukee tribe was in the running again. They’ve fought a quixotic battle against the IRS, alleging that their members are exempt from US taxation on their income from a casino. The tribe has been fighting the IRS in court (and losing, time after time). Most recently, the Tax Court ruled that an IRS levy wasn’t an abuse of discretion.

However, that’s not the most recent ruling against the tribe. Just last week the 11th Circuit Court of Appeals ruled against the tribe. The tribe had appealed a dismissal of a lawsuit against former tribal officials, attorneys, a law firm, and an investment firm:

Applying the Rule 9(b) standard to the present complaint, we note that the district court previously afforded the Tribe the opportunity to amend its complaint to add particularity. In doing so, the Tribe submitted a 314-page second amended complaint which, at first blush, appears to contain particularity…The complaint’s 314 pages, therefore, appear largely to be an attempt to create the impression of specificity through page-number “shock and awe.”

Let’s just say that the Court was neither shocked nor awed:

The deficiency of the pleadings exists at a more fundamental level. Looking first at the allegations concerning the attorney defendants, the complaint suffers from a wholesale lack of detail to satisfy the plausibility standard of Iqbal and Twombly or the heightened requirements of Rule 9(b)…No attempt is made, however, to articulate what services were deemed legitimate and proper, what services comprised part of the alleged fraudulent scheme, and what rates were inflated…There is, therefore, insufficient specificity to distinguish between what attorney matters the Tribe deems to have been legitimate and what the Tribe deems to have been illegitimate. Finally, the Tribe alleges a kickback scheme in which the attorneys received payment and refunded money to Cypress, but there are no factual references to support these allegations. [foonote omitted]

The decision of the lower court was affirmed. And, yes, there’s worse to come.

Our final runner up was IRS Commissioner John Koskinen. While I applaud the lead he appears to now be taking on identity theft, Commissioner Koskinen’s reaction to the IRS scandal has been ridiculous. I agree with Joe Kristan’s comment earlier this year:

His glib, arrogant and obstructionist response to the Tea Party scandal, full of denials of the existence of information that subsequently surfaced, has destroyed his credibility. There’s no hope that the IRS will get improved funding as long as he is around to spend it.

Yet Mr. Koskinen’s bad leadership pales to the amazing tale I’m about to tell.


Stillwater, Minnesota is like many small cities in the midwest. It’s a popular day trip for residents of the Twin Cities (Minneapolis and St. Paul), and it’s largest industry appears to be tourism.

In 2006, Kenneth Harycki owned Customized Payroll Solutions in Stillwater and was its mayor. He was a CPA and had a nice business. He took on new clients in 2007, Thurlee and Roylee Belfrey (brothers) who ran some home health care businesses. So far, nothing out of the ordinary.

Unbeknownst to Mr. Harycki, the Belfreys allegedly ran their business as their own personal piggy bank. That supposedly including defrauding the US Department of Health and Human Services and skimming off payroll tax deposits. Mr. Harycki discovered this after he took the Belfreys on as clients:

Within the first few payroll cycles for Model Health Care, Harycki “concluded that while payroll taxes were being withheld from the wages of employees, those taxes were not being paid over to the government,” according to his guilty plea.

Now, when I discover a defalcation against a client I will, of course, report it to them. If I discover a client is committing payroll tax fraud (thankfully, I’ve never had this happen), I’m required to tell them to stop, and to drop them as a client. Mr. Harycki, a CPA, certainly understood the ethical requirements of his profession.

Well, maybe not.

Mr. Harycki had other ideas of what to do. Back in January when I first reported on this, I gave the three choices that could have been considered:

(a) Tell them that the taxes aren’t being paid, that’s violating the law, and you need to fix this (which could include setting up payment plans with the IRS and Minnesota, or just paying the withheld funds);
(b) Tell them that if they don’t start remitting the withheld funds that he would need to quit the engagement; or
(c) Join the conspiracy.

Yes, Mr. Harycki decided to join the conspiracy. And boy did he do so!

According to the defendant’s guilty plea, on February 18, 2010, HARYCKI created the entity MKH Holdings, Inc., to assume control over bank accounts used to fund businesses operated by the co-conspirators. The entity was used to cause funds falsely reported on income tax returns to be paid to the co-conspirators and others. During the course of the conspiracy, HARYCKI also incorporated other businesses, obtained employer identification numbers, paid for personal expenses, filed false tax returns, and opened and used numerous bank accounts for the benefit of the separately charged co-conspirators in order to avoid payment of taxes.

There’s not much to add here. Mr. Harycki should have, once he discovered the fraud, told them of the law violations and quit the engagement. The only good that is coming from this is that Mr. Harycki appears to be cooperating with the Department of Justice in the cases against the Belfreys (who are now also facing a tax fraud charge).


That’s a wrap on 2015! While I’m hopeful that 2016 will find me bereft of candidates for the Tax Offender of the Year award, I suspect my cup will again run over.

I wish you and yours a happy, healthy and prosperous New Year.