Cobbler’s children go barefoot, tax lawyer’s income goes unreported.

January 18th, 2013 by Joe Kristan
Flickr image courtesy Lara604 under Creative Commons license.

Flickr image courtesy Lara604 under Creative Commons license.

Judges are often hard on tax pros who get in trouble.  They seem to think practitioners should know better than to underreport income or fudge deductions.  That led to a bad result for California attorney Owen Fiore in Tax Court yesterday.

Mr. Fiore apparently was the model of a rainmaking partner.  Unfortunately, he failed to delegate other duties, according to Judge Holmes:

His sophistication did not extend to his management of the firm’s finances. Fiore came to rely on a three-checkbook method of accounting — one for the general account, one for the client trust fund, and one for minor expenses such as filing fees. The preponderant flow of dollars was thus through the general account. Client billings went into the general account; payroll, office rent, and the firm’s other expenses came out of that account. Fiore even handled payroll in a way that would have been familiar to lawyers of a hundred years before — writing out checks to each associate and employee by hand on paydays. At the end of each year, he would write out a W-2 for each employee by hand.

The attorney came under financial pressure, and things at the firm got out of hand until he turned over management of the firm to a partner in mid 1999.  Unfortunately, the IRS came poking around in time to look at the pre-transition returns.  After Mr. Fiore ignored one too many requests for a meeting, the examiner turned the case over to the Criminal Division.

Special Agent Lisa Sasso took over the investigation. She started by requesting copies of Fiore’s 1996 and 1997 tax returns from IRS Service Center — but they were missing the Schedules C. Unlike the civil agents, Sasso didn’t ask for meetings — she just showed up unannounced at Fiore’s office in March 2002. She read Fiore his rights and asked him questions about his billing procedures, books and records,  and business expenses. After her initial visit, she requested documents  for the 1996 and 1997 tax years. Fiore sent her some documentation, but  didn’t cough up any work papers to tie his information to his return.  So Sasso sent a summons to Fiore’s bank and then she did a bank-deposits analysis for 1996 and 1997.

Things went badly from there.  The agent detected unreported income, and Mr. Fiore was eventually pleaded guilty  and was sentenced to 18 months in federal prison for underreporting 1999 income.  He contested the IRS imposition of civil fraud penalties for 1996 and 1997.  Judge Holmes said that the cobbler should have minded his own shoes (my emphasis)

Notwithstanding his busy schedule and administrative shortcomings, he must have known that there was a very high probability that he wasn’t reporting all of his income. His educational background and work experience would alert him to the likely outcome of his haphazard income-estimation method — that he was likely failing to report substantial amounts of income. Fiore knew he was neglecting firm administration and running a high risk of not reporting taxable income.

We also find that Fiore deliberately avoided steps to confirm the possibility of unreported income. He could have easily confirmed whether his estimates of gross income were correct by checking his business-account bank statements. He also had a three-ring binder for each taxable year that included a copy of all the bills and deposit slips.

     Fiore in fact admitted to willful blindness “not for the purpose of defrauding the government, but rather, sadly, for the purpose of getting and keeping clients.” At the very least, this is an admission that he believed his time was better spent on getting clients than confirming whether he reported all his income — even when he suspected that at least some taxable income wasn’t being properly reported. We therefore find that Fiore was willfully blind, weighing in favor of finding fraud.

     And with particular weight given to this willful blindness we find that the Commissioner has met his burden of proving by clear and convincing evidence that Fiore filed fraudulent returns.

The court upheld the 75% civil fraud penalty for 1996 and 1997.

The Moral?  Sure, you’re busy.   Don’t be too busy to deal with an IRS agent; they won’t just go away if you ignore them.  And if you are too busy to take care of your tax filing requirements, you may wish you had taken the time to tend to your cobbling.

Cite: Fiore, T.C. Memo. 2013-21

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