Artful Dodger is a fictional character in the Charles Dickens novel Oliver Twist. Mr. Dodger’s name represents what he was skilled at: pickpocketing.

176 years after Oliver Twist was first published, the name Artful Dodger reappears in an arguably more appropriate fashion in a statement made by Manhattan U.S. Attorney Preet Bharara:

As alleged, Glafira Rosales gave new meaning to the phrase ‘artful dodger’ by avoiding taxes on millions of dollars in income from dealing in fake artworks for fake clients. Her arrest shows that no matter how clever the scheme, attempts to hide income from the government to avoid paying taxes on that income will be discovered and prosecuted.

In the complaint, Rosales is charged with filing three false income tax returns and for failure to file FBARs (Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts) for five years.

My first reaction to reading this story: How come Rosales wasn’t also charged with perpetrating the allegedly fraudulent dealings of the artworks?

When the evidence to prove certain illicit conduct is not particularly strong, then authorities may pursue the perprtrators with tax fraud charges if income is earned from the illicit conduct and not reported to the federal government. Perhaps the evidence seeking to establish that the artworks Rosales sold were counterfeit was not nearly as strong as the evidence of failure to report the income earned on the sales.

Section 61(a) of the Internal Revenue Code states “gross income means all income from whatever source derived.” All income is included in gross income unless another provision excludes it. There is no exception for income earned from illegal activities.

Rosales apparently sold several “never before exhibited and previously unknown paintings” that she claimed were by the hand of famous twentieth century artists such as Mark Rothko, Jackson Pollock, and Willem de Kooning. During the years in question, Rosales said she was selling the paintings on behalf of clients who wished to remain anonymous, and that she would collect a commission for the sale and remit the remainder to the clients.

The complaint alleges such clients never existed and she collected all of the proceeds of at least $12.5 million from 2006 through 2008 from the sales of the paintings, funneling them into a foreign bank account.

Of course, if she kept all of the money and failed to report the income on her tax returns, that’s a strong case for tax fraud. And there’s a strong case for failure to file the FBAR if she stored at least $10,000 of the funds in a foreign bank account and did not file the FBAR for the years in question. The complaint alleges Rosales had over $1.8 million in a bank account in Spain for each year.

Rosales’ actions have had a rippling effect in the art dealing community. According to Reuters, art dealer M. Knoedler & Co. shut down after 165 years in business in part because of a lawsuit accusing the dealer of selling forged paintings purchased from Rosales.

Yesterday, Rosales made a brief appearance in court and was denied bail. Her next court date is June 20.

She faces a maximum sentence of three years in prison for each of the three false tax return charges. She also faces a maximum sentence of five years in prison for each of the five failure to file FBAR charges.

Submitted by Brad Polizzano on Wed, 05/22/2013 – 11:22