According to the New York Times, the duo is accused by Italy's Guardia di Finanza of failing to pay taxes on over $1 billion in consolidated income on all of their businesses.
The Guardia de Finanza, an Italian police force focusing on fiscal crimes that works with the Italian finance ministry, claim the each of the designers has failed to pay taxes on $588 million of undeclared income. They investigation unit also wants to press charges against the fashion company's tax advisor and three Dolce & Gabbana executives.
If the case does go to criminal trial, the maximum conviction for criminal fraud against the Italian government would be five years, with other factors raising the maximum to seven years.
A less serious punishment would be recouping the taxes and imposing a large fine, which WWD reported would be around $1.3 million.
One of the biggest red flags for the Guardia di Finanza was the 2004 sale of Dolce & Gabbana and D&G to Gado Sri, a Luxembourg-based company that also had ties to the designers.
The investigation unit claims that the $508 million sum that the companies were bought for was well under market value and also that the Luxembourg-imposed taxes on the sale were much lower than what the Italian government would have required.
"Since when does one have to pay taxes on money one never actually collected," they said in a statement at the time. "It's an absurd demand based on a completely abstract calculation. This higher taxable sum...is a virtual figure we have never received, the result of a theoretical accounting exercise."
According to the Times, the entire Dolce & Gabbana empire is said to have made $1.46 billion in the fiscal year ending March 31, 2010.
In related news: hear from the two designers themselves about tapping Madonna for their Fall 2010 campaign.