They got audited.
A Florida couple set up a ministry and a theme park devoted to the “young earth” theory that dinosaurs and humans walked the earth together. Things didn’t go so well, and the husband ended up going to prison on federal tax charges. Meanwhile the IRS went after his wife for civil tax fraud penalties. The IRS won in Tax Court yesterday.
The wife at first asserted she hadn’t filed tax returns for a number of years because she had no taxable income. The IRS then went through the tedious process of analyzing bank deposits, finding over $14 million in income and just short of $7 million in deductible expenses over nine years. You can assume that the IRS wasn’t as aggressive in looking for deductions.
The Tax Court looks at a number of factors to determine whether there is fraud. One is the absence of records:
In a letter attached to her untimely filed returns, petitioner wrote: “I have not kept financial records, as I did not know that I needed to do so.” Petitioner introduced no records of her income and did not substantiate the amounts she claimed as income on her tax returns.
Although petitioner claimed that she was unaware of the obligation to keep financial records, we reject this explanation as not credible. Accordingly, petitioner’s failure to keep and/or provide records of income and expenses is indicative of fraud.
The day went badly for the taxpayer, with the court saying the evidence “overwhelmingly” demonstrated that she had fraudulent intent.
The Moral? Failing to keep records hurt the taxpayer in two ways. It implied that she was cheating, and it probably led to a much higher tax — and certainly higher fraud penalties – than if she had kept records and filed properly in the first place. Even a cave man can figure that out.
Cite: Hovind, T.C. Memo 2012-281.
Update, 10/5/12: Peter Reilly has more.