Jeffrey J. Wirth, once a prominent player in local commercial real estate circles, pleaded guilty Friday to conspiring to evade federal taxes.

At a hearing in U.S. District Court in Minneapolis, the 53-year-old Plymouth man admitted funneling funds from his businesses to support a lavish lifestyle, including the $2 million purchase of an island in St. Alban's Bay in Lake Minnetonka and another $3 million to build a mansion there.

Another $600,000 was used to buy a house in the Cedar Lake neighborhood of south Minneapolis, plus tens of thousands of dollars for world travel and other perks, according to Assistant U.S. Attorney William Otteson. Some of the spending was recorded falsely on the company's books and tax returns as business expenses.

Wirth is the owner and CEO of the Wirth Cos., a Twin Cities-based commercial real estate firm that developed the Grand Hotel in downtown Minneapolis, the Grand Rios Hotel & Waterpark in Brooklyn Park and the Grand Lodge Hotel & Waterpark in Bloomington.

He faces up to five years in federal prison for the crime, and an as-yet-undetermined amount of restitution to the IRS. No date has been set for sentencing.

Wirth, along with his ex-wife, Holly C. Damiani, and their tax preparer, Michael J. Murry, were indicted in August 2011 for defrauding the IRS by failing to pay their true tax obligations. Wirth and Damiani, both of whom have accounting degrees from the University of Minnesota, divorced in 2008 after 28 years of marriage.

Dressed in a conservative business suit for the 30-minute hearing, Wirth answered a series of questions posed to him by Judge Ann Montgomery by replying, "I understand," or "I do," or, simply, "Yes."

Wirth admitted that he and Damiani often recorded personal expenses as business expenses, understating the company's income for tax purposes. From 2002 through 2005, he claimed a salary of just $12,000 on his W-2 forms, although the true amount of income was thousands more. In some cases, the trio allegedly claimed bogus "management fees" on their taxes in an effort to reduce the company's taxable income to nearly zero.

Additionally, Wirth failed to report on his company's tax returns "substantial amounts of income" related to the development of the Grand Rios Hotel & Waterpark and the Grand Lodge Hotel and Waterpark. This caused his adjusted gross income, taxable income and total tax on the tax returns he filed with Damiani to be "grossly understated," according to the U.S. attorney's office.

Wirth estimated the tax loss was between $2.5 million and $7 million.

His attorney, Chris Madel, said Wirth "is a good man who has employed thousands of Minnesotans. He stepped forward and did the right thing."

Wirth had been set to go to trial May 29.

Last week, Damiani pleaded guilty to one count of filing a false federal individual income tax return. At the hearing, her attorney said Damiani had been "assisting" the government in its investigation of her ex-husband and Murry and may have been called as a witness in the trial. Damiani awaits sentencing.

Murry, who has been charged with one count of conspiracy to defraud the United States, and two counts of preparing a false individual tax return, will be in court next Tuesday for a plea hearing. If convicted, he faces a maximum sentence of five years in federal prison on the conspiracy charge and three years on each tax count.

Janet Moore • 612-673-7752