A Case of Extravagant Tax Evasion, or Why the IRS is Interested in Your Trip to the Bahamas

James and Theresa D. owned and operated a Somerville engineering and surveying business. Between 2002 and 2008, James and Theresa withheld over half a million dollars in payroll taxes from their employees’ paychecks. Curiously, the money never made it to the IRS. This of course caught the government’s eye.

James and Theresa were penalized, and asked to open a special trust account for employee withholdings. Unfortunately for them, they did not follow the instructions. The couple took the money out for other things. Then they closed the account without IRS permission.

James and Theresa were indicted in July 2010. Their classic defense? They didn’t mean to. They said they would like to pay, but could not.

Prosecutors were left scratching their heads over that one.  The couple had vacationed in Aruba, the Bahamas, Cancun, France, and the Jersey Shore. On top of that, prosecutors discovered another interesting habit: James and Theresa spent $280,000 on the home shopping network. In all, the couple had spent over $5,000,000 on their cushy lifestyle. These luxuries cost nearly ten times the amount owed the IRS.

After being convicted and sentenced to 51 months in prison, James and Theresa appealed. They argued the evidence of their lifestyle was irrelevant. The Third Circuit Court of Appeals is the federal appeals court that covers New Jersey. Recently, it heard the case.

James and Theresa argued that their extravagant lifestyle didn’t prove anything.  Not true, ruled the court. The judges decided that evidence of a luxurious lifestyle is indeed relevant to show that the pair’s failure to pay taxes was willful, not inadvertent.

There’s an old saying: If you’ve got it, flaunt it. This case may be the exception that proves the rule.