What happens when a taxpayer attempts to claim stolen funds as income on their taxes? Let’s take a closer look with this useful anecdote.
Steven Guynn was the owner of Team Systems, LLC (“Team Systems”). After Mr. Guynn semi-retired in 2001, company president Tamatha Byrum became the face of the company. Byrum interacted with customers, managed the business, and oversaw all the company’s finances.
Mr. Guynn did not keep a close eye on Team Systems’ finances. Instead, he relied exclusively on Byrum to advise him on the financial status of the company. Byrum had access to Mr. Guynn’s signature stamp, and was also given authority to write checks.
Using these tools, Byrum wrote checks to herself from the Team Systems checking account. In total, she wrote:
Additionally, she purchased motorcycle parts for her husband’s business using the Team Systems American Express and PayPal accounts. Those expenses came to a total of $84,884 between 2003 and 2005. These payments were hidden from both Guynn and the company CPA, who prepared the Team Systems financial statements and tax returns.
When Mr. and Mrs. Byrum filed their 2003 and 2004 tax returns, they did not report any of the income related to these payments. On their 2005 tax return, they listed the unauthorized payments as self-employment income. Soon after, the Byrum’s tax returns were selected for audit. This was when the theft was discovered.
After the IRS issued Notices of Deficiency, the Byrums filed petitions in the United States Tax Court. The Court held that gross income includes income from all sources…thus, it included the money stolen from Team Systems. Because the money did not qualify as a gift or loan, the Court found that the payments constituted unreported income.
The IRS also proposed to assert the fraud penalty against Mr. and Mrs. Byrum. Because Byrum provided false information to the IRS and did not report the payments as income on her tax returns, the Tax Court upheld the fraud penalty against the Byrums.
Do you have unreported income on a tax return that you have already filed? Call us, we can help.