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When you setup a law firm, or really any business, one of the first things that we tell you is to separate out your business transactions from your personal transactions.

It’s important for concepts like protecting the corporate veil, making sure you get all your tax deductions, and general financial and strategic planning. And don’t even get me started on how much easier it makes it to sell your business when you have good financials, including separate business and personal expenses.

So when a juicy case comes across your desk full of high-stakes gambling, extra-marital affairs, and yes, financial misdeeds including the f word (fraud), you know I’ve got to dig into it.

Maryland Grand Jury Indicts Well Known Attorney for Tax Fraud

On Thursday, January 16, 2025, a Maryland Grand Jury indicted Tom Goldstein on various tax charges. Goldstein is the sole owner of Goldstein & Russell, PC (an S-corp) and is a well known appellate litigator. He is also the publisher of SCOTUSblog, a website that covers the U.S. Supreme Court.

According to the indictment, Goldstein was involved in high stakes poker games, running up large debts with at least one billionaire “California businessman” to the tune of $9.89 million by 2021. The indictment also alleges that he used his law firm to employ and provide health insurance to at least four women that he was involved or intended to be involved with in a personal romantic relationship. The women provided no or unsubstantial services to the law firm.

Law Fees Should Go Into the Firm Bank Account

I know it seems pretty ridiculous to have to say this, but all income from legal services should go into the firm’s bank account. This is so that you can properly record it as revenue, deduct your expenses, and then apply the appropriate tax treatment to it.

Without the legal fees going through the firm’s bank accounts, it is hard for your accountant or Fractional Chief Financial Officer to know what is revenue. Of course, you could tell them that there was this transaction outside of the accounts, but that’s usually a missed step.

But why do I bring up this very basic premise? Well, Goldstein didn’t do that.

According to the indictment, Goldstein would direct some law firms that he worked with to send his payments to other accounts, not his law firm account. Notably, these payments were to help pay off or at least pay down his gambling debts.

As a result, these earned legal fees were never recorded by his law firm as revenue. This leads to a misstatement of income for tax reporting purposes. And it was substantial, which leads to this type of fraud charges.

Other Income Paying Firm Debts

Goldstein also allegedly used some of his gambling winnings to pay debts to some of the law firms he did business with. He did this to avoid paying taxes on gambling winnings and also paying off debts to those other law firms, or their owners. But it also had the effect of missing a potential valid deduction – assuming the debt to the other law firm was legitimate business expense.

Don’t Pay Personal Debts Out of Law Firm Accounts

We talked about making sure that all the legal fee revenue goes into firm accounts, but an equally important concept is that you shouldn’t pay personal debts out of the law firm account. And if you do, you definitely shouldn’t be deducting them on your tax return — because again, that’s fraud, especially at the level that Goldstein allegedly did this at.

It was pretty straight-forward, according to the indictment. Goldstein would initiate a wire from the law firm account to the winners of the gambling matches he lost. Or he was paying down the loan from the “California businessman.” And then this was classified as “Legal Fee [Expenses]” which would again reduce the taxable income each time.

Thus again leading to fraudulent tax returns and failure to pay the proper tax liability.

Employees Must Provide Services to the Firm

I know that it’s not an uncommon practice among small business owners, especially single shareholder or member businesses, to employ family and friends at inflated salaries and let them not do any work.

But guess what? That’s not proper and also amounts to tax fraud in some cases.

In Goldstein’s case, he allegedly hired four women for a romantic relationship. But they weren’t doing any work for the law firm. Or very little; not enough to justify the salary being paid. Nor the health insurance that he paid for (and deducted).

So not only is he committing tax fraud with improper deductions, he’s also breaking the contract he has with his insurer. Yikes.

By paying so-called employees, as well as their insurance, the business owner receives personal benefit (in this case, allegedly the affections of the individuals) while also trying to deduct the amounts from their revenue to reduce their tax liability.

Tip on Hiring Family and Friends to Avoid Tax Fraud

This is not unusual in a lot of family type businesses – I’ve seen it with children, parents, spouses, even girlfriends/boyfriends of the owners. But the key to making this employment relationship legit is that they need to provide actual services to the business.

So if you are hiring a girlfriend, make them a recruiter or something. Make sure that they are putting in the time commiserate with the salary they are receiving.

Yes, even if you are hiring your young kids to provide services to your firm so you can fund their ROTH IRAs and not have a big tax liability. They still need to provide services that are reasonable for their age and for reasonable wages. Excessive wages can and will get flagged for an audit. You can’t just give that kid $15,000 without them doing work for it and expect to deduct it.

Other Miscellaneous Charges (At least for our purposes)

Goldstein was also charged with things like mortgage fraud, for failing to disclose the liabilities related to the gambling debts. And not reporting all the gambling winnings. And not reporting gains on cryptocurrency transactions.

There are also “making false statements to IRS representatives” about various transactions. Remember, it’s often the coverup that gets someone in trouble.

What’s the Possible Penalty Here?

The DOJ Press Release says that, if convicted, Goldstein faces a “maximum penalty of five years in prison for each of the tax evasion charges; a maximum penalty of three years in prison for each count of assisting in the preparation of false tax returns; a maximum penalty of one year in prison for each of count of willful failure to pay taxes; and a maximum penalty of 30 years in prison for each count of making false statements to mortgage lenders. He also faces a period of supervised release, monetary penalties and restitution.”

The case is United States of America v. Thomas C. Goldstein, U.S. District Court of Maryland, 25-CR-00006.

See Also: Should I Buy A Business Vehicle to Save on Taxes This Year?

Lessons for Law Firm Owners

The basics here are pretty much that

  1. Law firm revenue goes into the law firm accounts.
  2. Law firm accounts should only be used for law firm expenses.
  3. Don’t hire people as law firm employees unless they provide services to the law firm.

And honestly, I know we are often high-stakes gamblers, at least when it comes to litigation or taking risks in our businesses. We have to have a certain tolerance for risk. But high stakes gambling, like poker tournaments, is just a recipe for disaster. You better be good at it. But definitely don’t hide it from the IRS and don’t bring your law firm into it.

Also, Goldstein isn’t going to be able to pawn this off on his accountants, saying that they messed up. The indictment was clear that he was given many opportunities to fix the record and make sure that transactions were properly classified, but he didn’t make mention of it.

Finally, it is worth noting that this was over a lot of years. It started in 2016. And here it is early 2025 before we even get an indictment, which is still very early stages of a criminal case. There’s still a lot that can happen here before the allegedlies are proven in court.

Perfection Not Required

Don’t let this case scare you as a law firm owner. It’s juicy because it’s a well known appellate attorney that is known for his Supreme Court advocacy as well as his website covering the Court. The details are eye-catching because it involves gambling with high stakes that most of us would never consider.

But the truth is that there will regularly be misclassifications. You might even miss some revenue here or there. But most cases are resolved without a criminal case. It is just an audit assessment, you pay the difference in what you owed vs what you previously paid and add some penalties and interest on top.

In this case though, it is the scale of the issue. Most firms aren’t intentionally misclassifying hundreds of thousands or millions of dollars of payments. Over a lot of years.

If you get most of it correct, it won’t reach the level of fraud.

Bottom line, maintain proper books and records. And file those tax returns with accurate information. Then you won’t be in a press release from the DOJ about tax fraud.

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