The Downfall of a Kingpin 5 Mistakes Al Capone Made that Led to His Conviction of Tax Evasion
1. He waited too long to start planning for his tax troubles.
2. He spent more lavishly than he could justify.
3. He thought his money was safe in unregistered offshore bank accounts.
4. He caught the ire of people in high places.
5. He hired the wrong attorneys for his case.
1. He waited too long to start planning for tax troubles.
Alphonse “Al” Capone was born of an immigrant family in Brooklyn, New York in 1899. He quit school after the sixth grade and joined a street gang. By 1920, Capone had become an influential lieutenant in the Colosimo mob in Chicago. By 1925, he became boss. He built a fearsome reputation in the ruthless gang rivalries of the period, as rival gangs were eliminated or nullified, and the Capone mob effectively owned and operated the entire suburb of Cicero. The St. Valentine’s Day Massacre on February 14, 1929 is often regarded as the culminating violent event of the Chicago gang era, as seven members a rival gang were machine-gunned against a garage wall. The massacre was ascribed to the Capone mob, although Al himself was in Florida at the time.
Al and his colleagues made a fortune on the rackets spawned by enactment of the Prohibition Amendment, specifically illegal brewing, distilling, and distribution of beer and liquor. Technically, Capone's profits from criminal activity did not have to be entered on a tax return until 1927, when the Supreme Court ruled that illegally earned income had to be declared. When this law was passed, Capone and his lawyers did try to take some steps to regulate his tax position, but it was too little, too late. From the beginning, when the money made it's way to Capone, it was almost all in cash. It is rumored that Capone’s Florida mansion was littered with countless bags filled with cash. Much of the funds were divided amongst his crew, running mob operations, and bribing officials to look the other way of his bootlegging and gambling operations.
Capone was well insulated, and had well-constructed plans to defend criminal charges for his violent crimes and bootlegging. However he was sorely unprepared for a tax evasion charge. Accordingly, Capone was convicted of three felony tax evasion counts and two misdemeanor failure to file counts, sentenced to a total of 11 years in a federal penitentiary, and fined $50,000. He was also ordered to pay the prosecution's court costs totalling $30,000. The costs of Capone’s years of extravagant living caught up with him behind bars, where he suffered from dementia related to late-stage syphilis. By the time he was released, his physician concluded that he had the mental capacity of a 12-year-old. On January 25, 1947, Capone died of cardiac arrest after suffering a stroke.
Had Capone been prepared to defend a case against the IRS, his fate may have been much different. 5It can be very difficult for anyone who is not experienced in dealing with IRS audits to ascertain whether or not a particular question or piece of information could potentially be damaging to your case or trigger an expansion of the IRS audit. Therefore, it is recommended that you seek the counsel of a qualified tax attorney if you are being audited by the IRS.
2. He openly spent more lavishly than he could justify.
In 1929, Capone might have been worth about $30 million, but no income tax return had ever been filed in his name. (In the 1920’s, only about 10% of people were legally required to file returns). In 1931, Capone was charged with income tax evasion, as well as with various violations of the Volstead Act (Prohibition) in the courtroom of Judge James Herbert Wilkerson. Wilkerson proved to be a thorn in Capone’s side throughout the trial, stymieing Capone’s attempts to obtain a favorable plea bargain, and later to influence jurors. Judge Wilkerson also allowed Capone's spending to be presented at very great length even though, legally speaking it was Capone’s income that was at issue in the case.
In an April 1930 interrogation, Capone had no answers for the hard questions he faced regarding the sources of income that paid for his gambling debts, houses, clothes and various other expenditures. At his trial, the prosecutor referred to $27,000 in silk shirts, $6,500 spent on meat to feed guests at Capone’s nightly poker parties, $8,000 on diamond belt buckles, and $116,000 lost on horse races. Workmen testified in court that he paid $100,000 in improvements towards his $40,000 Palm Isle Florida mansion.
The inability to account for his significant income, and lavish spending, was crucial to his conviction of tax evasion. This further demonstrates how a properly-implemented tax plan by a qualified professional may have changed his ultimate fate.
3. He incorrectly thought his “hidden” money was safe
Capone took some efforts to “hide” his money, but he did not do a very good job. Along with the lavish spending and reports of piles and bags of cash in his homes, Capone was linked to ledgers and bank accounts, no doubt which he had considered “hidden.” Part of what lead the Government to go after Capone was their successful prosecution of his brother Ralph, and the resulting discovery of five bank accounts in Cicero that were related to Al and his empire. Ralph was known as Al's personal money man.
While the existence of “hidden” bank accounts put the FBI and the IRS on to Capone’s scent, the first big break in the investigation came in the summer of 1930 when IRS special agent Frank J. Wilson stumbled across three bound ledgers seized in a 1926 raid of one of Capone's establishments. They were divided into columns with labels such as "Craps," "21," and "Roulette." Every few pages, totals were entered and then divided into smaller amounts among "Town," "Ralph," "Pete," and "A." With the ledger also including a few references to "Al" it wasn't much of a leap to conclude that the ledger recorded the monthly income from a gambling hall that went to Capone and his associates.
Thinking these accounts were safe was the mistake made by Capone that is the most relevant to the current changes in tax law, and is a mistake as likely to be made by a law-abiding citizen as a Mafia crime boss. It is worth noting that these accounts were in the same town where Capone’s gang was most powerful, their “hometown.” In contrast, current trends in IRS investigations involve “offshore” accounts in places such as Switzerland, Canada, and the Cayman Islands.
Part II in this series can be found here: http://thetaxlawyer.com/tax-evasion/information/al-capone-conviction-tax...
****Most of the information within this article is the IRs website page on the Al Capone case: https://www.fbi.gov/about-us/history/famous-cases/al-capone