Well, I think that Michael saw that they were crooks, but couldn't believe that the Archbishop et al. would dare to try to defraud a big bad gangster like himself. Which really was an amazingly stupid move in retrospect...

I also think that Michael's fortune could have been completely legitimate by this time. It is not clear in the movies, but the book does strongly suggest that he was a talented businessman in the normal sense too, so after GF II he could have payed his taxes and still become very rich.