Form 1040, the federal personal income tax return, requires filers to report all taxable income. This requirement extends beyond earnings like salary, wages, and tips to cover income from many other sources, including interest, pension plans, and Social Security benefits. On Schedule D (Form 1040), taxpayers are also required, where applicable, to report capital gains, which are profits resulting from sales of capital assets such as stocks, home furnishings, cryptocurrencies, or collectibles. According to the IRS’ official 2018 Instructions for Schedule D, sales of “collectibles,” which are taxed at a maximum rate of 28%, “include works of art, rugs, antiques, metals… gems, stamps, coins, alcoholic beverages, and certain other tangible property.” That means taxpayer Brian Gimelson should have reported the $1.2 million sale of Renaissance master Caravaggio’s famed painting “David With the Head of Goliath,” which scholars believe was completed sometime around 1610. However – as you might have guessed from the title of this article – Gimelson failed to report the income, leading to an IRS criminal investigation that culminated in his guilty plea last fall. According to a recent Department of Justice press release providing updates on the case, in February 2019 Gimelson was sentenced to 18 months in federal prison.
Appearing before U.S. District Judge Tanya Walton Pratt of the Southern District of Indiana in September 2018, defendant Brian Gimelson, 48, of Lawrenceville, New Jersey, pleaded guilty to two counts of tax evasion, a violation of 26 U.S. Code § 7201 (attempt to evade or defeat tax), in connection with unreported income from the sale of a Caravaggio painting. In court, Gimelson admitted to failing to report to the Internal Revenue Service approximately $1.2 million from the transaction.
In order to facilitate concealing the income, Gimelson, the DOJ reports, “created a company, had his wife serve as managing member of the company, and used this company to facilitate the Caravaggio Painting transaction.” This entity, though on paper controlled by Gimelson’s wife, was in fact controlled by the defendant, who “directed his wife to make frequent and substantial cash withdrawals on his behalf from company accounts…” These cash withdrawals were then used by Gimelson “to purchase collectibles and precious metals, among other things,” according to the DOJ.
Following his guilty plea last September, Gimelson more recently appeared in court for sentencing, again before Pratt, who sentenced Gimelson to 18 months in federal prison, plus three years of supervised release following his incarceration. In addition, Pratt ordered Gimelson to pay IRS restitution in the amount of more than $432,450 – an amount equivalent to the tax losses caused by his evasion of tax laws.
All things considered, Gimelson may have been relatively fortunate to receive an 18-month sentence. In accordance with 26 U.S. Code § 7201, the federal statute that defines and establishes the maximum penalties for tax evasion, this offense carries a potential sentence of up to five years in prison, accompanied by criminal fines of up to $100,000 (or $500,000, for corporations). Note that criminal fines are separate from, and additional to, IRS restitution. Criminal fines help to support the judicial system, whereas IRS restitution is meant to compensate the government for financial losses caused by tax crimes.
Tax fraud carries serious criminal and civil penalties, as do related offenses like tax perjury (26 U.S. Code § 7206(1)), aiding or assisting false tax returns (26 U.S. Code § 7206(2)), willful failure to file or pay taxes (26 U.S. Code § 7203), and, for employers and small business owners, willful failure to collect or pay over tax (26 U.S. Code § 7202). And with the 2018 tax filing deadline around the corner, the number of IRS tax audits is about to increase.
If you’re worried about tax mistakes from the past – or have questions about the best tax strategies for the future – our experienced IRS tax attorneys are here to help. To set up a reduced-rate consultation with a tax lawyer and CPA in your area, contact the Tax Law Office of David W. Klasing online, or call (800) 681-1295 today.
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