For tax cheaters, 2008 was not a good year. Celebrities, sports figures, and other famous people who underestimate the IRS may wish they could have a do-over for some of their previous activities. Here's a recap of some of the high-profile cases that hit the newspapers in the last year.
Wesley Snipes and his two accomplices were all convicted of tax evasion last spring, though in typical Hollywood fashion, the actor called the verdict a "victory." Snipes, who was paid multi-millions for his movies in the last fourteen years or so, claimed that he only owed taxes on income earned from foreign sources. You may recognize that as part of the often debunked tax dodge known as Section 861. Based on that argument, Snipes not only failed to file tax returns for several years, but after paying $12 million in taxes for 1996 and 1997, he filed for and got refunds for the total amount, with the assistance of a tax protestor and a former accountant.
Snipes could've been sentenced to as many as six years in prison and $15 million in back taxes plus penalties. So when the verdict came down as a mere three years in prison and a $5 million fine, Snipes characterized it as a "win"... it seems these things can only happen in Hollywood. In a post-script, last August the court tacked on $217,000, the amount it cost to prosecute Snipes.
When the IRS went after "Girls Gone Wild" and "Guys Gone Wild" founder Joe Francis for felony tax evasion earlier this year, the celebrity said that a jealous Uncle Sam was targeting a youthful and inventive entrepreneur. Then there was his own accountant who, after preparing tax returns for Francis for 2002 and 2003, went to the IRS in 2005 and confessed to beefing up those returns with more than $20 million in bogus business expenses. Francis's trial was set for September 2008, but the latest word is that his attorneys were trying to get the trial date delayed until 2010. If found guilty, he could face up to 10 years in prison and pay fines of about half a million dollars.
Actor Nicolas Cage faced down the IRS after he was accused of including $3.3 million of personal expenses in his list of business expenses on his 2002, 2003, and 2004 tax returns. Plus there was a $1.5 million discrepancy between what the IRS says he was paid for his lead in the movie National Treasure and what Cage says he got... a paltry $17 million fee. In a sort of double-whammy, the IRS not only disallowed some of Cage's deductions, but they also said that some of the items he deducted amounted to constructive dividends paid to him. The combination would've added more than $1.8 million to Cage's tax bill.
The actor challenged the IRS on some of the charges and ended up with a tax bill of merely $666,000, plus unspecified interest. Unlike Wesley Snipes's attorneys, Cage's lawyer doesn't exactly call it a "win," but does point out that the downward adjustment is proof that Cage was well within his rights to fight the tax agency.
Brazilian racecar driver Helio Castroneves is accused of failing to pay income taxes on more than five and one half million dollars in income he earned from racing and from the use of his name for endorsements. The IRS says that Castroneves, with the help of his sister and his attorney, diverted those fees into a Panamanian shell company and also into a Dutch firm, and various Swiss banks. Last fall, Castroneves appeared in a Miami courtroom in leg irons and handcuffs, while the judge set bail at $10 million and ordered him not to leave the country. Even so, the judge did eventually allow Castroneves to race in the Nikon Indy 300 on Australia's Gold Coast on October 26th.
If Castroneves is convicted on all six counts of tax evasion against him plus one count of conspiring to defraud the U.S. government, he and his sister, Katiucia, could each face a maximum of 35 years in prison, while their attorney could be looking at 20 years. In an update on his case, the racecar driver's attorneys are pushing to delay his trial until after the 2009 racing season. Otherwise, he may lose his spot as a driver for Team Penske. Owner Roger Penske says since the indictment, other racers are clamoring to take Castroneves's place.
Crocodile Dundee star Paul Hogan fought crocs and won, but he may not escape the bite of the Australia Crime Commission (ACC). The ACC accuses Hogan of participating in what they are calling the largest tax fraud in Australia's history. Hogan is far from being alone in this alleged scandal, but he may be the most famous individual involved. He and his financial advisor are accused of weaving a complex web of crimes designed to evade taxes in Australia and the United States. Among other shady dealings, the ACC says Hogan borrowed money from one of his companies and structured the repayment to manufacture a bogus deduction for interest paid, to the tune of about $1 million. The ACC says Hogan also tried to dodge taxes in the United States and Australia by claiming residency in neither.
The probe into these alleged crimes is called Operation Wickenby, which includes the pivotal involvement of Strachans, a Swiss accounting firm. Operation Wickenby is now in its fourth year and has been not been as successful as the ACC had hoped, but recent developments in Australia's federal courts may have given the investigation new teeth.
When it comes to name dropping, Raffaello Follieri may have won the prize. After transitioning from Italy to New York, he told everyone that he had tight connections with the Vatican, including the Pope himself, and that he had come to do official business on behalf of the Catholic Church. His goal was to secure investors to buy unused properties that the Church wanted to sell, then develop the properties in ways that would enhance the community, such as senior centers.
His story must've seemed plausible because he attracted big name investors including Bill Clinton and Clinton's wealthy friend, Ron Burkle, as well as Follieri's well known girlfriend of five years, Anne Hathaway. Unfortunately, the scam fell apart when, over a period of years, only two properties were purchased, though much money was invested. As it turns out, that money seems to have been supporting Follieri's lavish lifestyle, which included an apartment in Trump Towers costing $37,500 per month.
Last June, he traded that apartment for much-less lavish digs... a jail cell at a Manhattan Metropolitan Correctional Center, serving time for 21 counts of fraud and money laundering. Follieri remained in jail because he was unable to raise bail, set at $21 million.
In October Follieri was sentenced to 4 and 1/2 years in prison and was ordered to relinquish $2.4 million of proceeds from his illegal activities. In December, Follieri's victims won a $3.6 million judgment against him, though there appears to be no clear way he can pay it back.
While not technically a tax cheater, singer Melissa Etheridge has declared her intention to become one and is urging others to follow. In November, California passed Proposition 8, which restricts the definition of marriage to a union between a man and a woman. This is the second time Californians have banded together to defend this definition of marriage. In 2000, they passed Proposition 22 defining marriage as a union between a man and a woman. However, in May 2008, a majority of California Supreme Court judges overrode the will of the people and declared same-sex marriage a constitutionally protected right. The passage of Proposition 8 in November 2008 reaffirms that California citizens wish to keep the definition of marriage as between a man and a woman.
In a blog post following the passage of Prop. 8, Etheridge wrote, "Okay, so I am taking that to mean I do not have to pay my state taxes because I am not a full citizen. I mean, that would just be wrong, to make someone pay taxes and not give them the same rights. Sounds sort of like that taxation without representation thing from the history books."
Stars Behind Bars
She went on to encourage a general tax revolt, calling specifically on Hollywood gays, like Ellen DeGeneres, as well as rank-and-file individuals to withhold their state income taxes. Only time will tell how serious she is about becoming a tax cheater.