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TAX FRAUD IS FOREVER, EVEN WHEN LOVE ISN'T

January 20, 2005

As a group, former spouses bear a heavy burden. If you only talk to embittered ex-husbands, for example, you could get the impression that their ex-es are responsible for everything from the failure of the League of Nations to the difficulty of getting your colleagues at work to make a fresh pot of coffee.

Another thing about bitter ex-husbands: after awhile, people stop listening. This week the Tax Court featured a case in point.

Winston Knauss operates a charter yacht business in Ft. Lauderdale. He also has a track record as a successful real estate developer. The IRS had assessed Mr. Knauss for civil fraud penalties, saying he had overstated his costs on some yachts he sold by over a million dollars - understating his income by the same amount. Mr. Knauss admitted that he couldn't document the additional costs, but said there was a good reason.

   Petitioner contends that he in fact made expenditures to
   account for his claimed basis, but is unable to 
   substantiate the expenditures because all of his records
   were stolen by his estranged spouse.

What, the dog wasn't hungry? The Tax Court wasn't buying:

   We do not find credible petitioner’s claim that his boat
   records were stolen by his former spouse. The former 
   spouse testified credibly that the only records she took 
   when she left petitioner were those pertaining to the 
   couple’s personal joint checking accounts.  She denied 
   taking records related to his yachts, yacht charter
   business, or any other records besides the joint 
   checking accounts in either 1995 or 1997.

Well, it's just "he said, she said," right? Maybe not:

   Moreover, some of the purportedly stolen records in 
   fact turned up as part of petitioner’s evidence intended 
   to document expenditures for yachts built in later years.
   That is, although petitioner claimed that the records 
   substantiating claimed capital improvements to the Sir 
   Winston II that he made from January 1996 to January 
   1997 were stolen, invoices for yacht-related 
   expenditures dated within that period were offered by 
   him into evidence for other purposes.

Tax Tip: If you plan to say your ex stole your tax records, do not, under any circumstances, say she stole the same records you introduce as your own evidence.

Things went downhill from there, and the Tax Court upheld the IRS assessment of $545,489 in tax and $475,875 in fraud penalties for 1991-1997.

HOW FRAUD OUTLIVES LOVE

While love often endures, no law requires it to. Not so with tax fraud. Most tax returns are final, for better or worse, after three years; if you underpaid, you're home free, and if you overpaid, you're out of luck. Fraudulent returns, in contrast have no statute of limitations. This was bad news for Mr. Knauss, who was past the three-year line.

While we all look for things that last in this uncertain world, we mostly can do without eternal statutes of limitation.

Cite: Winston Knauss, T.C. Memo 2005-6.

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