Law360

Two reality stars recently made headlines for being prosecuted for tax crimes and fraud. In both cases, the reality stars surely knew that consequences were coming: one was the subject of an IRS criminal investigation, and the other had already pleaded guilty. The defendants in both cases made missteps that, if avoided, might have otherwise allowed for more lenient outcomes. The lessons here are to not hide information from the government, and certainly to not alter or omit information provided to the government.

The decision to indict reality star Michael Sorrentino (aka “The Situation”), formerly of MTV’s Jersey Shore, was likely based upon alternations, discovered by the government, made to his company’s books and records, which were produced pursuant to a grand jury subpoena. The Situation and his brother, Marc Sorrentino, were indicted two weeks ago for filing false tax returns for 2010 and 2012, as well as conspiracy to defraud the United States, and The Situation was also charged with failure to file a tax return for 2011.

Together, they allegedly failed to report over $8.9 million in income earned through promotional and other activities (for instance, publishing a comic book that featured The Situation as a superhero, of course) and improperly claimed deductions for business expenses that were really for personal use (such as “personal grooming expenses”).

In what is standard practice in criminal tax investigations, the government had caused a grand jury subpoena to be issued to the Sorrentinos’ accounting firm for their 2012 QuickBooks files. In the documents provided by the accounting firm, the IRS discovered entries that had been altered whereby certain taxable payments were reclassified as nontaxable payments. Although it has not yet been made clear who directed that those alterations be made, the IRS learned of these “reclassifications” during its criminal investigation, and the act of altering corporate records to cover up a crime almost certainly influenced the decision to prosecute in this case.

This also explains how quickly these charges were brought, because, typically, a criminal tax investigation can take years before any charging decision is made. Indeed, the criminal statute of limitations for tax crimes is six years. Here, the brothers were indicted for conduct relating to their 2012 tax returns, among others, and those returns would have been filed in April or October 2013. That the indictment was issued before the end of 2014 is remarkably fast timing. The speed with which charges were filed can likely be explained by what might be easy evidence gleaned from the government’s discovery that the corporate records had been altered.

Likewise, a federal judge’s decision to sentence reality star Teresa Giudice to 15 months’ imprisonment recently was likely influenced by false and incomplete statements she caused to be submitted during the pre-sentence investigation stage of the case.

Teresa and Giuseppe (Joe) Giudice, husband and wife stars of the Real Housewives of New Jersey, had been named in a 39-count indictment that described a number of schemes that generally allowed them to live beyond their means for years, beginning in 2001. The schemes involved submitting false documents and making fraudulent statements to lenders, banks and a bankruptcy court, and, in Joe’s case, failing to file tax returns. Earlier this year, they pleaded guilty to conspiracy and bankruptcy fraud charges, and Joe also pleaded guilty to failing to file a tax return. Earlier this month, Teresa and Joe were sentenced to 15 and 41 months’ imprisonment, respectively.

There was speculation in the media that Teresa would not serve jail time, in part because Joe admitted to being responsible for the schemes and also because the couple has four young daughters, making it difficult to separate a mother from the family home. That speculation was silenced, however, when the alleged false and incomplete financial documents were discussed at sentencing. A judge relies upon these documents in order to assess the defendant and assist in determining an appropriate sentence, including what amounts are appropriate to order in terms of restitution and a fine.

Teresa reportedly failed to note in her financial documentation a number of assets, including several cars, all-terrain vehicles and construction equipment. Teresa also claimed she owned no jewelry and stated that she only had $25,000 of household furnishings. Anyone who watches the show (which probably includes the government and possibly the judge, too) knows that Teresa has jewelry as well as a well-appointed home, which, incidentally, was covered by a $1 million insurance policy.

United States District Judge Esther Salas was not pleased with these omissions, stating at sentencing that “it feels like things have been hidden.” Judge Salas also directly stated about Teresa that “what you did in the financial disclosure really sticks in my craw. It’s what the court has a problem with. It shows blatant disrespect for the court.”

It probably did not help Teresa’s case that Joe also demonstrated a similar level of obfuscation regarding his finances. Joe’s plea agreement required that he file accurate personal returns for the years 2000 through 2011, which he had not yet done. He was also required to pay back taxes and penalties amounting to $240,000, and, remarkably, neither he nor his lawyer seemed to know if that had yet been repaid, according to media reports.

Though Teresa has since implied in television interviews that the fact she is a television star subjects her to more scrutiny than others, she is somewhat off the mark there. In both her case and the Sorrentinos', that records were altered or assets were omitted before providing information to the government, clearly aggravated the circumstances.

It is always imperative that truthful statements be made to the government or the court, but perhaps even more critical when providing documents in response to a grand jury subpoena or in connection with sentencing. In both situations, how this information is conveyed and that it is truthful can sometimes make the difference between being able to negotiate or avoid criminal charges and being sentenced to prison. What is gained by being truthful and direct nearly always outweighs the risk that the government will uncover what has been hidden, and the government has many more tools at its disposal to find that evidence to use against its targets and defendants.

The lesson to be truthful in government submissions is important for both attorneys and clients, alike. In an interview aired last week, Teresa appeared to contend that her lawyers or accountants might have been responsible for the omissions in her financial documents. Whether or not that is true, it demonstrates how clients, along with their counsel, have to be responsible to ensure that the information provided is accurate and complete and should be diligent in reviewing all documentation submitted. Clients are best equipped to know what they own and can identify if items are missing, such as a listing and valuation of all of their possessions.

Finally, tax evasion charges can often ensnare international stars, as well. Lionel Messi, who is widely considered the world’s best (and highest-paid) soccer player, is facing tax fraud charges in Spain. Messi and his father, Jorge Messi, were accused of tax fraud by utilizing companies in Belize and Uruguay from 2007 through 2009 to conceal $5.4 million in income earned in endorsement deals with Adidas, Pepsi-Cola, and others.

Messi contended that his father controlled his finances to such a degree that he should not be held culpable for any tax fraud, and his father caused a “corrective payment” of over $6.2 million to be made to satisfy the unpaid tax with interest. Apparently satisfied with that explanation, the prosecutors thereafter recommended that the charges be dropped. A Spanish judge rejected this recommendation, explaining that Messi will still face tax fraud charges even if he did not “have complete knowledge of all the accounting and business operations nor the exact quantity” but was only “aware of the designs to commit fraud and consent to them.”

This is yet another example of the importance of understanding financial documents and being certain that they are accurate and complete. Messi and his father would be well-counseled to be truthful and complete as this criminal proceeding progresses.

"Tax Lessons From Reality Stars On What Not To Do," by Stephanie C. Chomentowski appeared in the October 16, 2014 edition of Law360. To learn more, please click here or visit www.law360.com. Reprinted with permission from Law360.