The Tax Court Judge Sentenced for Tax Crime

In what might be the most ironic tax case in recent memory, Diane Kroupa—a former United States Tax Court judge who spent over a decade deciding tax disputes between taxpayers and the IRS—was sentenced to 34 months in federal prison in June 2017 for conspiring to defraud the United States of $450,000 in taxes. The case, which saw Kroupa and her husband, Robert E. Fackler, plead guilty to multiple tax crimes, offers a stark lesson in the perils of judicial hypocrisy: the very person charged with upholding tax law became one of its most flagrant violators.

The irony is almost too perfect to be real. Kroupa's journey to the Tax Court began in Minnesota, where she served as Chief Judge of the Minnesota Tax Court before being appointed to the federal bench by President George W. Bush in 2003. For the next 11 years, she presided over cases involving tax deficiencies, penalties, and disputes over deductions—the same types of issues that would later form the basis of her own criminal indictment. She resigned from the court in 2014, just two years before federal prosecutors would unseal a 10-count indictment against her and her husband Fackler.

The Scheme

The fraud, which ran from 2004 to 2010, was straightforward in its audacity. According to court documents, Kroupa and Fackler understated their taxable income by approximately $1 million, resulting in an underpayment of taxes exceeding $450,000. They accomplished this through two primary methods: falsely claiming personal expenses as business deductions and failing to report income from a rental property.

The personal expenses claimed as business deductions were particularly brazen. Court records show that the couple deducted pilates classes, jewelry purchases, vacations, home renovations, rent, and utilities as business expenses for Fackler's consulting firm. While Kroupa was on the bench deciding whether other taxpayers' deductions were legitimate, she and her husband were pushing boundaries.

The indictment, filed in April 2016 by the U.S. Attorney's Office for the District of Minnesota, charged the couple with conspiracy to defraud the United States, tax evasion, making and subscribing false tax returns, and obstruction of an IRS audit. The investigation was conducted jointly by the IRS Criminal Investigation Division and the United States Postal Inspection Service.

On October 21, 2016, Kroupa pleaded guilty to conspiring to defraud the United States. Fackler also entered a guilty plea. The following June, U.S. District Judge Susan Richard Nelson sentenced Kroupa to 34 months in prison and ordered her to pay more than $450,000 in restitution. Fackler received a 24-month sentence for his role in the scheme.

How Could She Not Have Known?

The question that haunts this case is perhaps the most obvious one: How could a Tax Court judge not have known that what she was doing was illegal? Kroupa spent her professional life interpreting tax law, evaluating the legitimacy of deductions, and ruling on the credibility of taxpayers' positions. She had deep expertise in the very area where she committed fraud.

There are several possible explanations, none of them particularly satisfying. Perhaps she believed that her position as a judge would protect her from scrutiny, or that the IRS would be reluctant to investigate a sitting Tax Court judge. Perhaps she convinced herself that the deductions were legitimate, despite their obvious personal nature.

The timing of her resignation in 2014 raises additional questions. Did she resign because she knew the investigation was coming? Or was the resignation unrelated to the tax issues? The two-year gap between her resignation and the indictment suggests that the investigation may have been ongoing while she was still on the bench, or that it began shortly after she left. Either way, the sequence of events invites speculation about whether she saw the writing on the wall.

Was There an Ulterior Motive?

The case raises uncomfortable questions about whether there were any ulterior motives behind the prosecution. Kroupa's fraud was discovered through a routine IRS audit, and the investigation followed standard procedures. There is no evidence in the public record of any personal vendetta or political motivation. The U.S. Attorney's Office for the District of Minnesota prosecuted the case based on documented evidence of tax evasion, and both Kroupa and Fackler pleaded guilty, admitting to the conduct.

Yet the case is notable for its irony, and one cannot help but wonder whether the IRS and the Department of Justice were particularly motivated to pursue a case against a former Tax Court judge. The optics of prosecuting a judge who had spent years ruling on tax disputes would have been powerful, and the case would have sent a clear message that no one is above the law. But there is no evidence that the prosecution was anything other than routine enforcement of tax laws against someone who happened to be a former judge.

The fact that Kroupa pleaded guilty suggests that the evidence against her was overwhelming. She did not mount a defense, instead admitting to the fraud.

The Facts of the Case

The facts are damning. Between 2004 and 2010, Kroupa and Fackler systematically understated their income by approximately $1 million. They claimed personal expenses—pilates classes, jewelry, vacations, home renovations, rent, and utilities—as business deductions for Fackler's consulting firm. They failed to report income from a rental property. They falsely claimed financial insolvency to avoid paying taxes on canceled debt.

The scheme was not sophisticated. It was the kind of fraud that any experienced tax professional would recognize immediately. The deductions were obviously personal in nature, and the failure to report rental income was a straightforward omission. This was not a case of aggressive tax planning that pushed the boundaries of the law; it was outright fraud.

The couple's attempts to obstruct the IRS audit only compounded their legal troubles. They provided false information to the IRS, making it more difficult for the agency to uncover the full extent of the fraud. This obstruction charge added to their legal exposure and likely contributed to their sentences.

The Legitimacy of the Tax Court

The Tax Court is a specialized federal court that hears disputes between taxpayers and the IRS. It was established in 1924 as the Board of Tax Appeals and was renamed the Tax Court in 1942. The court has 19 judges, appointed by the president for 15-year terms. It is the primary forum for resolving tax disputes without requiring taxpayers to pay the disputed amount first, making it an essential institution for tax administration.

The court's legitimacy depends on public confidence in its integrity and expertise. Tax Court judges are expected to bring deep knowledge of tax law to their decisions, and their rulings shape how the tax code is interpreted and applied. When a Tax Court judge commits tax fraud, it undermines that confidence and raises questions about the institution itself.

Kroupa's case is particularly damaging because it occurred during her tenure on the bench. While there is no evidence that her judicial decisions were directly affected by her own tax crimes, the mere possibility undermines public confidence. How can taxpayers trust a judge who is simultaneously violating the laws she is supposed to interpret?

The Tax Court has taken steps to address this. The court's code of conduct requires judges to maintain high ethical standards, and the court has procedures for handling conflicts of interest and other ethical issues. But Kroupa's case demonstrates that even these safeguards cannot prevent determined fraud.

The Importance of the Tax Court

The Tax Court plays a crucial role in the American tax system. It provides taxpayers with a forum to challenge IRS determinations without having to pay the disputed amount first—a significant advantage over other courts. The court's specialized expertise in tax law makes it an efficient and effective forum for resolving complex tax disputes.

The court's decisions shape how the tax code is interpreted and applied, affecting millions of taxpayers and billions of dollars in tax revenue. Tax Court opinions are binding precedent within the tax system, and they influence how the IRS administers the tax laws. The court's legitimacy is therefore essential to the functioning of the tax system itself.

Kroupa's case highlights the importance of maintaining that legitimacy. When a Tax Court judge commits tax fraud, it not only damages her own reputation but also undermines public confidence in the institution. The court's response—cooperation with the investigation and prosecution—demonstrates that the institution takes these matters seriously and is committed to maintaining its integrity.

The Aftermath

Kroupa has since been released from prison, but her legacy remains a cautionary tale. The Tax Court, an institution designed to provide fair and expert resolution of tax disputes, was temporarily tarnished by one of its own. Yet the system's response—investigation, prosecution, and conviction—demonstrates that the mechanisms of accountability, however imperfect, can still function even when the violator is a former judge.

For tax professionals and practitioners, Kroupa's case offers a sobering reminder: expertise in tax law does not confer immunity from its requirements. The same rules that apply to ordinary taxpayers apply to judges, lawyers, accountants, and advisors. The complexity of the tax code may create opportunities for aggressive planning, but it does not excuse outright fraud.

The case also highlights the importance of the IRS's audit and enforcement functions. Kroupa and Fackler's scheme was uncovered through routine IRS examination, and their attempts to obstruct the audit only compounded their legal troubles. For taxpayers facing IRS scrutiny, the lesson is clear: cooperation and transparency, while potentially costly, are far preferable to obstruction and false statements.

Conclusion

Diane Kroupa's case stands as a powerful illustration of a fundamental truth: those who interpret and enforce the law are bound by it, and violations carry consequences regardless of position or expertise. In the end, the Tax Court judge who couldn't tax court properly found herself on the wrong side of the bench, facing the same system of justice she had once administered.

The irony is profound, but it is also instructive. The Tax Court's legitimacy depends on public confidence in its integrity, and that confidence is earned through the consistent application of the law, regardless of who is before the court. Kroupa's case demonstrates that even those who sit in judgment are subject to the same standards, and that the system can and will hold them accountable.

As the Tax Court continues to hear cases and issue opinions, Kroupa's story fades into the background. But it remains a powerful reminder that expertise and position do not confer immunity, and that the law applies to everyone—even those who are supposed to interpret it.