5 Famous Tax Cheats

Who doesn’t want to avoid taxes? Judge Billings Learned Hand famously summed up the American tax situation, saying, “Anyone may arrange his affairs so that his taxes shall be as low as possible … for nobody owes any public duty to pay more than the law demands.”

Avoiding taxes is one thing, but income tax evasion is another. Tax evasion occurs when a person or business uses illegal means to escape paying taxes, whereas tax avoidance is the practice of using legal means in order to lower the amount of taxes owed.

These famous tax evaders found ingenious (and illegal) ways to avoid paying up. Find out how much they owed and how they were caught.

Key Takeaways

• Tax avoidance is legal, but tax evasion, which involves using illegal methods to not pay taxes, can come with serious consequences.
• Many individuals have tried to evade taxes, from gangsters like Al Capone to celebrities like Wesley Snipes.
• Cheating the tax system can result in fines and jail time so it’s smart to just pay your taxes, not to mention that it is legally required.

Walter Anderson

Anderson’s case is the largest tax evasion case in the history of the United States. This former telecommunications executive was accused of hiding his earnings through the use of aliases, offshore bank accounts, and shell companies.

In 2006, Anderson entered a guilty plea in which he admitted to hiding approximately $365 million worth of income. He was sentenced to nine years in prison and restitution of $200 million.

A typographical error in the amount of the federal government’s judgment against Anderson has prevented him from having to pay the majority of the taxes owed.

The IRS conceded taxes and penalties for three years included in Anderson’s case, however, Anderson is still responsible for $23 million owed to the government of the District of Columbia.

Al Capone

This infamous mobster’s name has been associated with a variety of illegal acts including bootlegging, prostitution, and murder. However, only one illegal act landed Al Capone in prison—income tax evasion. Under Capone’s watch as boss of the Chicago Outfit, the organization generated estimated revenues of $100 million per year.

Due to the removal of the word “lawful” from the 16th Amendment in 1916, even income earned via illegal activities is subject to tax.

This put criminals like Capone in a bind because they could either admit to breaking the law and file proper taxes (essentially confessing), or cheat on taxes and risk getting jailed for evasion. In addition to paying fines and the outstanding tax bill, Capone was sentenced to 11 years in prison.

Joe Francis

The “Girls Gone Wild” creator is no stranger to controversy. In 2007, he was charged with felony tax evasion for reportedly filing false corporate tax returns. Authorities accused Francis of filing over $20 million worth of false business expenses in order to keep from paying taxes. A guilty plea allowed him to escape the felony charge.

However, it appears Francis has not fully escaped his tax woes. In November 2009, the IRS filed a tax lien against Francis. The tab is a whopping $33.8 million.

Note

If you pay your taxes late, the IRS will charge you a penalty. The penalty is 0.5% of the unpaid taxes for each month they remain unpaid, but it won’t exceed 25% of the unpaid taxes.

Wesley Snipes

Federal prosecutors have accused the “Blade” star of many offenses. Snipes allegedly hid income in offshore accounts and did not file federal income tax returns for several years. The actor’s federal tax debt was estimated to be in the range of $12 million.

In 2008, Snipes was acquitted of felony tax fraud and conspiracy charges but was found guilty of misdemeanor charges.

Snipes was sentenced to three years in prison. His accountant, Douglas P. Rosile, and tax protester Eddie Ray Kahn were charged as co-defendants. Rosile was sentenced to four and a half years. Kahn was sentenced to 10 years.

Leona Helmsley

Dubbed the “Queen of Mean,” this hotel operator reportedly told a former housekeeper, “We don’t pay taxes. Only the little people pay taxes.” Helmsley and her husband, Harry, accumulated a multi-billion dollar real estate portfolio.

Despite their immense wealth, they were accused of billing millions of dollars in personal expenses to their business in order to escape taxes. In 1989, Helmsley was convicted on three counts of tax evasion. She served 18 months of federal prison time. Coincidentally, she was ordered to report to prison on income tax deadline day for that year, April 15, 1992.

What Is the Difference Between Tax Avoidance and Tax Evasion?

Tax avoidance and tax evasion are methods of reducing the taxes you pay; however, they are on opposite sides of the legal system. Tax avoidance is legal whereas tax evasion is illegal. Tax avoidance involves reducing your taxes through legal methods, such as deductions, credits, and loopholes to lower your tax bill. Tax evasion on the other hand involves lying, creating fraudulent documents, not correctly reporting income, and other means which are not legal.

How Can I Legally Reduce My Taxes?

There are a handful of ways to legally reduce your taxes. Contributing to tax-advantaged retirement accounts, such as 401(k)s and IRAs reduces your taxable income. If you’re self-employed, you can take advantage of deductions such as office supplies, car payments, gas payments, travel, and more. Other ways to reduce your taxes are through charitable donations and health savings accounts (HSAs). For investing, you can employ tax-loss harvesting to offset the tax you pay on gains.

Does the IRS Check Every Tax Return?

No, the IRS does not check every tax return; in fact, the amount of tax returns they check is very few as most are automatically processed. The IRS does employ various systems to detect anomalies that could be red flags. If red flags arise, they can take a deeper look and ask for more information.

The Bottom Line

Some people go to creative lengths to save money, but there is a clear line between creativity and breaking the law. Minimizing taxes through legal means is a smart tax strategy but tax evasion comes with tough consequences. As we can see from the troubles of these five people, what you may save now will not be worth what you have to pay later.