Roy and Jodi Hoskins, owners of Companions went to prison for tax evasion.
The link below is about Jodi's appeal of the sentencing, Its lengthy, but the paragraph I'm referring to is the 8th one down, where it states:
"The district court pointed to the prostitution activities of Companions' escorts and applied a two-level enhancement because it found Hoskins “failed to report or to correctly identify the source of income exceeding $10,000 in any year from criminal activity.” USSG § 2T 1.1(b)(1)."
I didn't know you had to report income from criminal activity???? I would think it would be normal not to report it, and the judges should understand that!!!!
In Paragraph 6 it states:
"After an investigation, the government discovered that Companions received at least $1,053,552 in credit-card payments alone in 2002. Further, because Companions escorts explained that the company received 50–70% of its payments in cash, the government projected the cash intake for 2002 was equal to the credit-card receipts. Thus, the government estimated that Companions' 2002 gross receipts were $2,107,104—more than $1.2 million in excess of the income claimed by the Hoskinses. "
Interestingly enough, the one thing that is not on there is gifts, however the IRS does collect a tax on the gift from the doner of the gift, so if you want to call all your dontations to gals as gifts to get around them having to declare it as income, you still run afoul. (There is a large deductable however, I think it may be as much as $13,000 now which is a lot of whoopee.)
On the subject of gambling gains and losses, be careful on this one. Someone very near and dear to me is involved with his State's revenue department about whether losses can be taken against winnings. He has very substantial winnings and when he tried to deduct the losses he was told that only a "professional gambler" may take those losses to offset the winnings.
His accountant believes that he will eventually win in tax court, but the legal costs are also very great.
A professional gambler's winnings are considered self-employment income and his losses can be used to directly offset the winnings. Other gamblers, like those who go to the casino on the weekends, can only deduct their losses up to their winnings, and only as a miscellaneous itemized deduction. Your friend may be better off paying the taxes because, like you said, his legal fees may surpass the money involved, and he may also wind up having to pay the taxes, along with penalties, interest, and court costs.
He has paid the taxes to avoid the interest and penalites, but is considering going to tax court to challenge their rulings, especially as he has found several favorable rulings that he thinks helps his case.
Not sure what state is involved but the offsetting as an itemized deduction applies at the Federal level. Most states do not allow it unless you are a professional gambler. If he deducted losses at the state level he may have some problems. Happened to a friend of mine here in Massachusetts and it cost him.