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In news that is rocking the tax community, the Department of Justice has issued a press release announcing that Judge Diane Kroupa and her husband have been indicted for conspiracy to commit tax evasion and obstruction of an IRS audit.  Judge Diane Kroupa was a 2003 appointment to the U.S. Tax Court by President George Bush, Jr.  Before that, from 1995 to 2001 she was a Minnesota Tax Court Judge.  She received her law degree from the University of South Dakota and she worked for the IRS and in private practice before becoming a judge.

In 2014, Judge Kroupa retired from the Tax Court.  Although Tax Court Judges are term appointments, as the Tax Court is an Article I (administrative) court, they are typically renewed without regard to the political party of the new president.  Judge Kroupa was in good health and was not expected to retire at her age, younger than 60.  Her retirement came as a surprise and piqued the curiosity of many tax practitioners at the time, and I heard speculation or rumors that the retirement was due to family issues.  However, this news casts new light on her retirement.

According to the press release, which can be found by clicking here:

According to the indictment and documents filed in court, between 2004 and 2012, Kroupa and Fackler conspired to evade their tax obligations.  Kroupa was appointed to the U.S. Tax Court on June 13, 2003, for a term of 15 years, but she retired on June 16, 2014.  During the same period, Fackler was a self-employed lobbyist and political consultant who owned and operated a business known as Grassroots Consulting.  From 2004 to 2013, Kroupa and Fackler owned a home in Minnesota.  From 2007 to 2013, they also leased a second residence in Maryland.

According to the indictment and documents filed in court, as part of the conspiracy to defraud the United States, Kroupa and Fackler fraudulently claimed personal expenses as Grassroots Consulting business deductions.  They fraudulently claimed the following personal expenses as deductible business expenses: rent and utilities for the Maryland home; utilities, upkeep and renovation expenses of the Minnesota home; pilates classes; spa and massage fees; jewelry and personal clothing; wine club fees; Chinese language tutoring; music lessons; personal computers; and expenses for vacations to Alaska, Australia, the Bahamas, China, England, Greece, Hawaii, Mexico and Thailand.

According to the indictment and documents filed in court, Kroupa and Fackler made a series of other false claims on their tax returns, including failing to report approximately $44,520 that Kroupa received from a 2010 land sale in South Dakota.  The defendants falsely claimed financial insolvency to avoid paying tax on $33,031 on cancellation of indebtedness income.

According to the indictment and documents filed in court, in 2006, Kroupa and Fackler concealed documents from their tax preparer and an IRS Tax Compliance Officer during an audit.  During a second audit in 2012, Kroupa and Fackler caused misleading documents to be delivered to an IRS employee in order to convince the IRS employee that certain personal expenses were actually business expenses of Grassroots Consulting.

According to the indictment and documents filed in court, between 2004 and 2010, Kroupa and Fackler purposely understated their taxable income by approximately $1 million and purposely understated the amount of tax they owed by at least $400,000.

 The press release also contains a quote which highlights the obvious fact that Judge Kroupa was a Tax Court Judge and familiar with the tax laws on taking deductions.  As a tax practitioner, the IRS and the DOJ likely believe they will have an easier time meeting the mens rea of willfulness that is higher in tax cases.  In tax cases, willfulness requires the intent to violate a known duty – meaning you have to know that what you are doing is illegal under the tax laws.  In most criminal cases, because tax laws are complex, individuals may not be pursued where there was at least an tenuous basis for the deductions (e.g., home computers that were at least used for business part of the time) even if the basis does not withstand scrutiny.  However, the benefit of the doubt on these finer points of law is unlikely to be afforded by the IRS to a Tax Court Judge.  Whether this will fly in front of a Minnesota jury, who is not so tax savvy is another question.

The indictment is not a conviction, and the defendants are afforded a presumption of innocence until proven guilty beyond a reasonable doubt.  None of the above allegations by the government have been proven in a court of law.

Daniel Layton, the author of this post, is the principal of Tax Attorney OC.

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