The IRS has long held a reputation as one of the most feared federal agencies in the United States. Individuals and businesses owners routinely fear the consequences of an examination by a trained IRS auditor. But, what is the source of this nearly universally –held fear? While the potentially huge fines and penalties that can be imposed as the result of an audit are certainly anxiety inducing and unwelcome, a financial setback can be overcome. What most likely strikes fear into the hearts of taxpayers in California and throughout the nation is the potential for an IRS examination to uncover criminal tax wrongdoing that can result in a lengthy federal prison sentence.
The aggressive investigatory tactics used by the IRS and strategic prosecutors of the Department of Justice have long been constants in the life of the American taxpayer. Let us take a look back at the 1980 tax evasion conviction and subsequent sentencing of American icons at the height of their fame, Steve Rubell and Ian Schrager, former owners of New York’s Studio 54.
Studio 54 was opened in 1977 and, in short order, established itself as the height of New York nightlife. The club attracted a who’s who of American and international celebrities including David Bowie, Elizabeth Taylor, Mick Jagger, Jackie Kennedy Onassis, Andy Warhol and Michael Jackson. In just its first year of business, the club pulled in a then-whopping tally of $7 million dollars. At the time the club owners boasted that, “only the Mafia made more money”.
However, the club was beset with regulatory and other problems from the outset. Shortly after opening, the club was raided for noncompliance with the state’s liquor licensing laws. Likewise, the boast regarding the nightclub’s profitability apparently attracted attention of federal regulators. A December 15, 1978 New York Times article, detailed a raid on the club that, at first, seemed to only add to the club’s mystique and draw. During the raid, agents from the IRS apparently discovered and came into possession of boxes of financial documents from the club. Furthermore, federal agents claimed to find an array of drugs and other contraband in locked safes in the club’s basement. Authorities also claimed that cash had been stashed in ceiling panels and garbage bags throughout the club.
In June 1979, the co-owners and manager of the club were indicted on federal tax charges. The charges alleged that the owners and managers conspired to evade more than $2.5 million in taxes during, roughly, the club’s first year of operation. One of the partners, unbeknownst to the others, immediately pleaded guilty to the tax evasion charges. The other owners – Steven Rubell, Ian Schrager, and Richard DeCourey – faced trial on a 12-count federal indictment. If convicted on all charges the men could have each faced up to 36 years in prison.
The men did not go on to trial, but rather pleaded guilty to tax evasion in November 1979. The men admitted to evading corporate taxes on nearly $800,000 in income that resulted in lost revenues to the federal government of $366,000. Despite the men’s efforts to make good on their unpaid taxes that included paying restitution for about 95% of the owed taxes, they were still met with a stiff sentence.
At sentencing for the federal tax crimes, Federal Judge Richard Owen stated, “Your crime, I conclude, is one of tremendous arrogance. You assumed you achieved your success on your own and you owed nothing to fellow citizens and the economic system…” He characterized the crime as “a well-organized, well-designed tax-fraud scheme.” For their crimes, the men were sentenced to 3.5 years in federal prison and $20,000 fines. The men also faced a suspended one-year term and five years of probation.
The IRS has built a reputation for going after high profile and well-connected individuals. If the agency can successfully pursue well-connected individuals with significant resources, they can identify and pursue tax evasion and other tax crimes in any individual or entity’s tax filing. Since that time, the technological and investigatory abilities of the IRS have only improved. Today, automated computer systems can review tax records in a manner that was only science fiction back in 1980. Individuals who still engage in tax evasion schemes are gambling with their freedom.
If you are concerned with potential tax mistakes, tax errors, or other noncompliance with obligations under the Internal Revenue Code, the Tax Law Offices of David W. Klasing can work to mitigate the consequences you face and bring you back into compliance with the law. To schedule a reduced-rate tax consultation with an experienced tax professional call 800-681-1295 or contact us online.