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TAX FRAUD: IT WORKS, UNTIL IT DOESN'T

July 28, 2007

It can be so tempting. Your company has made some money this year, and you'll need to pay some extra taxes. Your wife wants some remodeling done at home. What if you have the company pay the remodeling contractor and call it "repairs"? The bigmouth at the golf course says that's how he afforded his new house. You get a deduction, and you have domestic harmony. A great deal.

Until you get caught.

Standard IRS business examination procedures include reviewing paid invoices for possible personal expenses improperly deducted as business expenses. If that's happening and the IRS does show up, chances are pretty good they'll find it.

A Wisconsin businessman just learned this lesson the hard way.

Sheldon Lasky was CEO of Sadoff & Rudoy Industries, LLC, a Wisconsin scrap metal recycler. From 1999 through 2003 he had $876,772 in personal expenses paid and deducted by the company, without including the payments in his income. The IRS caught up with him, and yesterday he pleaded guilty to one count of tax evasion.

IT'S NOT JUST JAIL TIME

It appears likely that Mr. Lasky will serve 18-24 months in prison under the federal sentencing guidelines, the way I read the plea agreement. Unfortunately for him, serving time doesn't pay his taxes. The plea deal specifies that he will have to make good $351,753 in taxes, $263,814 in civil fraud penalties, and $285,733 in interest. That only covers the federal taxes; Wisconsin tax officials are likely to also be in touch with Mr. Lansky.

The Moral? Having your business pay your personal expenses to evade taxes is a bad idea, and the more you do it, the worse it gets.

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