Despite a duty to turn over employment taxes to the Internal Revenue Service (IRS), some business owners are tempted to withhold that money. When they do—it can lead to an IRS audit, or worse, an IRS criminal tax investigation. For a Michigan man, a federal grand jury recently returned an indictment alleging he skimmed more than $1 million off the IRS by pocketing his payroll taxes.
Longtime business owner Johni Semma owned the Bayside Sports Bar & Grill in Walled Lake, Michigan, in the Detroit area. Mr. Semma also owned and managed an adult entertainment establishment called The Coliseum. Along with the employment tax dispute, Mr. Semma is charged with failure to file an income tax return. The employment tax charges alone amount to 24 counts against the businessman.
While failure to properly remit or pay over employment taxes may not seem the most serious crime, it is a hardball issue for the IRS. Conviction on one count of employment tax fraud can earn five years in prison. Should Mr. Semma be convicted on all 24 counts, he is looking at some serious time behind prison walls.
The IRS routinely identifies and investigates employment tax scams that take a number of forms, including:
- Employment leasing: When an employer outsources their personnel and payroll responsibilities it is called “employment leasing.” While an employer contracts help from the outsourcing company, the outsourcer is responsible for collecting and paying over employment taxes. Sometimes these middleman organizations pocket employment taxes, close up shop, and disappear when notified of an impending IRS civil audit—leaving a significant tax liability.
- Pyramiding: A common employment tax scam is the practice of “pyramiding,” which is the IRS term for business owners, like Mr. Semma, who withhold payroll taxes and pocket the money with no intention of turning it over to the IRS.
- Cashing out: When employers or outsource employment agencies pay employees in cash, the opportunity for tax crime rises across the board. In addition to skirting Workers’ Compensation laws, employers can falsify payroll records, underreport the amount of employees on the books, or underreport the amount of payroll taxes owed.
Mr. Semma also faces allegations that he failed to report significant income on the sale of his strip club after earning approximately $3.5 million on its sale in 2012. Altogether, Mr. Semma faces significant prison time, restitution, probation, and financial penalties. (Interested in reading the end result? Go here to read further.)
Whether a tax controversy is accidental or intentional, it is always a better strategy to retain a knowledgeable tax attorney before the IRS comes knocking on your door. From Offers in Compromise to other solutions, it is always easier to address a criminal tax matter before an indictment is returned.
Trusted advice from experienced tax lawyers in Cleveland
Whether you had prior knowledge, or you just discovered a false income tax return or payroll tax issue, our tax attorneys can help. At Robert J. Fedor, Esq., LLC we provide confidential, strategic options to tax litigation involving high-asset individuals and corporate assets. Contact us or call 800-579-0997 today.