by Brian Mahany
Last month the 7th Circuit Court of Appeals upheld a four + year sentence given to John McKinney in a criminal tax case. The facts behind the case tell the perfect story of how a simple tax debt can become a lengthy stay in a federal prison.
John and his brother Robert owned a construction business. Somewhere along the way, John fell behind on his taxes. That is not uncommon for self-employed small business owners who often have no withholding and hope to have enough cash to pay taxes at the end of the year. After several years of delinquent payments, the IRS issued a tax lien against him in 2003.
Tax liens are often the first real wake up call for many taxpayers. It’s virtually impossible to get a mortgage or even a credit card without first taking care of the lien. For most people, that means working out a payment plan with the IRS or submitting an offer in compromise. John would have been wise to try to address his tax problems then.
John and his wife wanted to purchase a home but the lien prevented the couple from getting financing. Instead, John’s wife, Chamethele, sought financing in her own name. She falsely claimed that she ran the construction business and earned $15,000 per month. John, of course, signed the income verification for the lender.
By purchasing the house in her own name, the couple were able to get their new home. That action defeated the IRS’s lien, caused Chamethele to submit a false loan application and caused John to sign false income verification and tax forms. With one simple transaction, both husband and wife committed several felonies.
It gets worse.
The scheme appeared so easy that John’s brother Robert and his wife Belinda did the same thing. Another mortgage, another false application and another false income verification.
By 2007, the IRS collections folks were hot on the trail of the brothers McKinney. A revenue officer visited the business in 2007. The boys said they had no work and were considering shutting down the business. Given the building and construction industry collapse in 2007, that apparently satisfied the IRS as the investigation was then closed.
It wasn’t until 2011 that the IRS determined the brothers had lied. Both brothers and there wives were indicted in February of that year. Ultimately John pleaded guilty to tax evasion, conspiracy to defraud the IRS and making false statements.
At sentencing, McKinney received a sentence of 57 months and restitution of $1.5 million. Last month a 3 judge panel upheld the sentence meaning McKinney will likely serve 4 years before being eligible for early release.
It’s very easy to fall behind with the IRS. Most people that we see never began by having an intention of not paying their taxes. A bad year or layoff or health emergency causes some people to put off paying taxes for a month or so. Unfortunately, for many there is always another emergency and a month becomes a year becomes several years. Had John McKinney cooperated with the IRS in 2007, the felony charges could have been avoided.
Lying to IRS agents and trying to move income to a spouse’s name to evade one’s tax obligation is a sure fire way to a criminal prosecution. Some IRS criminal division special agents intentionally seek an indictment of spouses and family members in the hopes of obtaining a quick guilty plea from the truly guilty party. In this case, it appears there was plenty of real guilt to go around.
The tax lawyers at Mahany & Ertl can help with a wide variety of criminal tax and collections matters. Obviously, our hope is to help get you into compliance before the criminal division becomes involved. Thankfully, the IRS follows a first contact policy meaning its usually fairly easy to avoid prosecution if you approach the IRS before they approach you. Automated collection notices and liens are often the last reminders before the fateful knock on the door.
If you are already under investigation, we can still help. We have obtained no prosecution letters for several taxpayers who were already under criminal investigation. Attorney Brian Mahany has years of experience as a former tax prosecutor and criminal investigator and partner Christopher Ertl has been defending criminal tax cases for over a decade.
For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege and kept in strict confidence. Even if you don’t hire us.
Mahany & Ertl – America’s Tax lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota & coming soon, San francisco, California (tax only).