Owning a business is no easy feat. It comes with a tremendous amount of responsibility, and requires extreme organization, patience and drive. One of the major challenges all business owners face is properly managing money and taxes—all the while following the letter of the law. When times get tough, it can be tempting for business owners to adjust how employment taxes are handled. In turn, this can lead to an investigation by the Internal Revenue Service, resulting in charges, fines, even arrests.


It’s important to protect yourself, your employees and your business, and hopefully this document can help you understand the depth of employment tax fraud schemes and the consequences of those actions. However, the attorneys at Robert J. Fedor, Esq., L.L.C. are knowledgeable when it comes to providing representation for those facing life changing criminal charges involving employment tax fraud. An experienced tax attorney with knowledge of IRS investigations and tax law is vital in cases involving fraud charges. For immediate representation, contact Robert J. Fedor, Esq., L.L.C. at 800-579-0997.


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Table of Contents


PART I: Understand Employment Tax Fraud

  • An Overview of Employment Tax Disputes
  • Why Paying Taxes is Important
  • What Constitutes a Tax Crime?


PART II: The Most Common Scheme—Tax Evasion

  • Tax Evasion—A Growing Crisis
  • Do You Know if You Filed a False Tax Return?
  • Exactly How Serious is Failure to File Your Tax Return?
  • How the IRS Builds a Case for a Failure to Pay Payroll Taxes


PART III: Other Common Employment Tax Schemes

  • Employee Misclassification
  • The Ups and Downs of Employment Leasing
  • Pyramiding—The In-Business Repeater
  • Cash on Hand—Paying Under the Table Can Cost You


PART IV: Precautions and Preparations

  • What if the IRS Reaches Out to Your Business: Understanding Civil Tax Audits
  • What Exactly Does “Getting Caught” Mean for a Business Owner and Their Business?
  • One Way to Avoid Tax Mismanagement: Early Interaction Initiative
  • Three Tips for Defending Against Allegations of Employment Tax Fraud
  • The Trust Fund Recovery Penalty—What is It?
  • Start Off on the Right Foot: Payroll Tax Tips for Business Start-Ups
  • Tips to Protect Yourself from Employment Tax Fraud
  • Watch Out for Whistleblowers


PART V: Recent Employment Tax Scam Stories

  • Payroll Tax Crimes Examples
  • Example of Failure to File
  • A Picture of Several Tax Fraud Schemes Rolled Into One
  • What Happens Once You’re Caught—Supermarket Owner Convicted of Tax Fraud
  • Hard Labor—UAW Chief Pleads Guilty to Tax Crimes
  • Extreme: $10 Million in Past Due Employment Taxes
  • Embezzlement from Deceased Client’s Estate
  • Results of Paying Under the Table

PART I: Understand Employment Tax Fraud

An Overview of Employment Tax Disputes

investigateWhether as employee or employer, taxes are a permanent workforce expectation. But let’s first go over what we already know. Employers must withhold and pay employment taxes over to the IRS. Those taxes include federal income tax, social security, Medicare, and unemployment taxes. Despite all the grumbling, these taxes provide important benefits to employees who pay into these federal programs. Here is a rundown:

  • Social security: Disability, survivors, and old age benefits are accrued by employees when they pay their social security taxes.
  • Medicare: Hospital and medical benefits are funded by the Medicare program.
  • Unemployment taxes: For workers out of a job, unemployment taxes can offer a lifeline of benefits and services.
  • Federal income tax: Federal taxes taken at the paycheck level ensure federal income withholding amounts are tallied and paid as earned. 

Collectively known as “employment taxes,” these monies can be easy pickings for business owners awash in red ink or looking to live beyond their means by keeping, rather than paying, these taxes.

Examples of employment tax scams

Employment taxes can be tempting to those looking for a bigger payday. The IRS has identified a couple of common employment scams including these:

  • Pyramiding: This well-known scheme is the one we talk the most about. An employer withholds employment taxes but fails to pay them over to the IRS. While this happens in the context of established, well-regarded businesses from time to time, it is also the domain of fly-by-night contractors who set up businesses like employment agencies. After doing business for a period of time, operators bank employment taxes and then quickly wind down the business by declaring bankruptcy before leaving town to set up shop in another town.
  • Leasing employees: The use of third-party vendors to lease, or lease back, employees can lead to employment tax problems in a couple of ways. If you arrange with a third-party provider to hire and handle your HR needs, it saves you in-house hassle because the provider is handling administrative tasks—including collection and payover of employment taxes. Sometimes these providers skip town with the money, or develop offshore tax routes to defer taxes.
  • False tax returns: Filing a fraudulent payroll tax return is an easy way to underreport wages earned. Failing to file at all is also a basic form of employment tax fraud.
  • Misclassification of Employees: Businesses might misclassify employees as independent contractors to evade the obligation to pay employment taxes.
  • S-Corp Officer Compensation Handled Like a Corporate Distribution: This mislabeling of compensation facilitates the avoidance of employment tax liability.
  • Paying in Cash: Employers often arrange to pay employees in cash to evade the responsibility for employment taxes. 

These are not new or novel mechanisms of employment tax fraud. Oftentimes, a business owner can become so enmeshed in the criminal enterprise, they may convince themselves they will not get caught, or what they are doing is not really a tax crime. But when the IRS comes calling, the situation quickly turns serious. The IRS rigorously pursues criminal sanctions against persons suspected of employment tax fraud. 

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Why Paying Taxes is Important

paying taxesA recent report from the IRS shows about the same number of us are paying the taxes we owe, and about the same number are not.

The tax gap, or the difference in taxes paid versus those potentially owed (as estimated by the Internal Revenue Service) in the United States is about $381 billion, by latest estimates. Those billions are monies that would fund a myriad of worthwhile programs and services throughout the country—were they paid as per federal tax laws.

In September of 2019, the IRS released its comparative report that looked at tax revenue in the years 2011 through 2013. There are five types of taxes reviewed by the IRS. These taxes include employment taxes, personal income taxes, corporate taxes, excise, and estate taxes. The bottom line is that the tax gap is roughly the same as it was during tax years 2008 through 2010. In this same report it estimates that about 83.6 percent of owed taxes are paid on time and voluntarily by U.S. taxpayers. By comparison, the percentage of taxes paid the same way in the 2008 to 2010 tax period was 83.8 percent—virtually the same. 

Notes IRS Commissioner Chuck Rettig, "Voluntary compliance is the bedrock of our tax system, and it's important it is holding steady. Tax gap estimates help policy makers and the IRS in identifying where noncompliance is most prevalent. The results also underscore that both solid taxpayer service and effective enforcement are needed for the best possible tax administration."

The tax gap is divided three ways:

  • Taxes that are underpaid: These are taxes that are reported, but not paid on time.
  • Taxes that are underreported: These are revenues that are understated on a tax return.
  • Taxes that are not filed: As the name implies, these are taxes that are not paid on time, nor are required tax returns filed on time.

Tax gap estimates are an important measure of compliance in the U.S. Compared to many countries, the U.S. enjoys a relatively high and stable rate of tax compliance. While most people are interested in saving on their taxes, or seeing tax rates reduced, tax revenue pays for necessary state and federal services. Without tax infrastructure, even basic expectations, like passable roads, good education, food safety, affordable utilities, and federal security can quickly go south.

Despite the budget squeeze at the IRS, the agency continues to push compliance through its criminal tax investigations, civil and criminal tax audits. That said, no one needs to pay more tax than legally owed, and there are smart strategies you can use to pay tax obligations, report wealth accurately, and protect individual or corporate wealth from unnecessary taxation. 

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What Constitutes a Tax Crime?

tax crimeYou or your company might underreport your income a little. Maybe you don’t reveal all of your foreign holdings on your FBAR. Or, maybe you cooked up a scam over a few years that finds you claiming deductions you have no hope of being able to support. Are you going to jail?

We talked earlier about the chronic defunding of the Internal Revenue Service (IRS). It is true—the number of IRS prosecutions for tax crimes has declined. So, in terms of crime, is the IRS aiming at your accounting practices?

An IRS mandate: Educate about and deter tax fraud

Within the IRS, the Criminal Investigation (CI) unit takes a hard look at tax fraud, tax-associated money laundering, and illegal proceeds earned by legitimate companies through a variety of fraudulent methods. Some of the crimes pursued by CI include:

  • Employment and payroll tax fraud: Payroll tax issues are common. Underreporting workforce numbers, collecting payroll taxes (federal unemployment, social security, and withholding taxes) and failing to pay them over to the IRS, or paying employees in cash under the table are just a few of the schemes pursued by the IRS. 
  • Refund fraud: Most people know that filing a false income tax return could turn into tax litigation. Individuals and tax preparers engage in refund fraud and sometimes identity theft in order to obtain an unearned tax refund. This is also the realm where fake deductions, exemptions, and business expenses come into play.
  • Abusive tax schemes: U.S. taxpayers who avoid filing regulatory reports like FBAR and FATCA could find themselves facing an IRS criminal tax investigation. With the proliferation of secrecy jurisdictions, individuals with significant wealth may seek the greater privacy available through offshore tax havens. There is often a fine line between an abusive tax scheme and a tax option used by an unwitting taxpayer trying to make legitimate use of offshore tax resources.

Committing tax fraud or tax evasion could provoke the interest of the IRS. But remember, the IRS is both underfunded and short-staffed these days. An important aspect of any tax crime is intent. It takes less time and money to work out a civil arrangement with a delinquent taxpayer, than it does to try and convict that same taxpayer of a criminal offense. 

Understanding Tax Fraud


PART II: The Most Common Scheme—Tax Evasion

Tax Evasion—a Growing Crisis

tax evasionAccording to a 2019 Brookings Institute report based on IRS statistics, tax evasion is responsible for one out of every six federal tax dollars owed but not paid. This has a huge impact on the U.S. economy. Every year, unpaid taxes amount to about 75% of the federal budget deficit.

The incidence of misreporting and evasion is particularly significant for sole proprietorships, farms, and high-income households. Illegal tax evasion and legal tax avoidance call into question the fairness of the federal tax system because lower-income households seem to pay more than their fair share of taxes.

Tax evasion is always illegal

Whether it is deliberate or inadvertent, tax evasion is illegal. Unreported income, reporting expenses you did not incur or failure to pay taxes owed are common forms of tax evasion. Employment tax evasion (such as paying someone “under the table”) is also a common type of tax evasion. Mistakes on a tax return are an example of inadvertent tax evasion.

According to the Brookings Institute, tax evasion rates differ depending on the type of taxes and the manner of reporting:

  • Payroll taxes and self-employment taxes account for 19% of tax evasion, but 39% of taxes paid.
  • Corporate taxes account for 9% of evaded taxes, but only 9% of taxes paid.
  • Individual income taxes account for 72% of tax evasion, but only 44% of taxes paid.

Legal tax avoidance strategies

While tax evasion can bring criminal penalties, including jail and substantial fines, tax avoidance is legal. Tax avoidance includes taking advantage of a property tax deduction and other deductions on a federal income tax filing as a way to limit or avoid taxes. Other legitimate forms of tax avoidance include setting up tax-deferred plans (IRSs, SEP-IRA, or 401k) and tax credits. Since the U.S. tax code is so complex, it's best to seek the advice of an experienced tax attorney before developing a tax avoidance strategy.

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Do You Know if You Filed a False Tax Return?

Most of us would not intentionally commit tax fraud. Being convicted of filing fraudulent tax returns can put a crimp in your professional life, not to mention the possibility of going to prison. Yet, some people commit tax crime without even knowing it.

When U.S. tax returns are filed, you sign on the bottom line that the information contained therein is accurate to the best of your knowledge. You attest that the return is an accurate reflection of your financial affairs as far as they are reported in the return.

If you have an accountant or tax preparer create your tax return, FBAR, or other report—you remain legally responsible for the accuracy of information you provide to the IRS. Errors made on the return that lead to fines are paid by the taxpayer.

Be careful when choosing who prepares the tax returns that you sign. The IRS provides a directory tool for locating a preparer in your area with credentials recognized by the IRS. Here are a couple of tips for choosing and using a tax preparer:

  • Never sign your return while it is blank as a convenience.
  • Steer clear of tax preparers whose fee is related to the amount of refund you receive.
  • Avoid tax preparers who guarantee you a bigger return than you might receive from another tax service.
  • Check the history and credentials of your accountant, tax lawyer, or tax preparer. Are they a sole practitioner—if so, are they established in the community? Working with a longtime accountant or tax attorney ensures there is someone around to answer your questions if the IRS comes knocking several years from now.
  • Be sure to obtain a copy of your return after it is filed.

The best way to protect yourself from filing a false income tax return is to verify the information going into your return and choose reputable professionals with verifiable credentials to prepare it. This does not mean you will never be audited—but it improves your chances of sailing through any questions that may eventually come your way.

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Exactly How Serious is Failure to File Your Tax Return?

failure to fileHow troublesome is it if you fail to file your annual tax return, or your quarterly business taxes? This is not a trick question. The answer is, “it depends.”

If you do not owe any taxes, there is no penalty or fine for not filing a tax return. If you do not file though, you are also not eligible for any refund you may be due. The Internal Revenue Service (IRS) refers to those who do not file tax returns (whether they owe or not) as “nonfilers.”

In the spring of 2020, nonfilers experienced the disadvantage of receiving economic stimulus payments later because they were not registered with the IRS.

While late refunds and other payments to nonfilers who have no tax obligation are unfortunate, they do not contribute to the tax gap. The tax gap is that gulf between how much tax should have been paid in any tax year, and how much was actually collected.

The U.S. relies heavily on voluntary compliance of taxpayers to file and pay their taxes. As employees, employment taxes that fund government programs are automatically withheld from your paycheck. Business owners are expected to calculate and file their taxes on time. Still, in 2019 the tax gap was $39 billion, so clearly there is a problem.

When identified, the IRS is not charitable with nonfilers who have a tax obligation that accrues due to a failure to file a return. The same thing holds for actual taxes owed on a fraudulent tax return. In the case of a false tax return, a taxpayer can quickly find themselves flirting with an allegation of tax crime.

Failing to file a tax return can quickly grow the amount of a tax liability. Taxpayers may earn a penalty for filing their return late. Even with an extension, there is a penalty for late payment of taxes owed. Combine any of the above with a false tax return and the amount of money owed goes up. Taxpayers trying to avoid paying by not filing a return can be charged with a misdemeanor or a felony. For those who simply quit paying their taxes over a number of years, an IRS criminal tax investigation can lead to federal prosecution.

The outcome of failing to file a tax return depends on a number of factors, including the skill of the criminal tax attorney retained to handle the matter. If you know you are in arrears, or are contacted by the IRS, speak with skilled legal counsel before responding to the IRS. The intervention of a good tax lawyer at any point in a tax matter can mitigate damages and lead to a better resolution than a criminal tax investigation allowed to run its course.



How the IRS Builds a Case for a Failure to Pay Payroll Taxes

building a caseFailing to pay payroll taxes is serious. The Internal Revenue Service (IRS) does not take these matters lightly. In some cases, penalties for such violations can result in personal liability for those who are deemed responsible for paying these taxes. If the allegations are successful, the IRS can hold the person accused of failing to pay these taxes accountable for 100 percent of the missed payment.

Essentially, there are two main factors that the agency must establish to build a successful claim. The first is that the accused is responsible and the second that the failure was willful.

The definition of a “responsible party” for these purposes is fairly broad. It does not just include those who are directly responsible for making payroll tax payments but extends to include anyone who “has a duty to perform and the power to direct the collecting, accounting, and payment of trust fund taxes.”

Liability for these taxes also requires a finding that the failure to pay was willful or reckless. It is important to note that this requirement is also interpreted broadly. The failure does not need to be intentional to meet this requirement. The fact that a qualifying individual is aware of the failure is often enough.

Seem harsh? It certainly can be. This broad scope can result in allegations against those who were unaware of a failure to make payroll tax payments. A piece in Accounting Web discusses a case that provides some clarification on how these factors are interpreted.

In this case, the president and CEO of a company were accused of failing to make payroll taxes. Since both had the ability to hire and fire employees and control the company’s bank accounts, the IRS build a case to accuse them of personal liability for failing to make payroll taxes. In theory, it sounds like these individuals could qualify for the above definition of those that are responsible for payroll taxes. In reality, they had hired a controller to take charge of these taxes as well as an accounting firm to run audits and complete income tax returns.

The business began to struggle financially. The accounting firm issued a clean audit but later noted the controller had overstated the business’ receivables and failed to pay payroll taxes. This led the business to bankruptcy.

The IRS accused both the president and CEO of failing to file payroll taxes and issued a trust fund penalty. The lower court agreed with the IRS’ above reasoning, finding in favor of the agency. On appeal, the penalty was overturned. The appellate court noted that the owners did not meet the definition of a willful or reckless failure to pay, likely due to the fact that they had “no actual knowledge” of the failure to pay.

What can I do to protect against tax liability?

Any allegation of wrongdoing from the IRS, including examples like the one noted above, should be taken seriously. Penalties for violations are often harsh. In addition to steep financial penalties, criminal penalties can also apply. As a result, anyone accused of a tax violation is wise to seek legal counsel.

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PART III: Other Common Employment Tax Schemes

Employee Misclassification 

Classifying employees as independent contractors has been around as long as employers started providing benefits. Employees may enjoy a host of benefits that contract workers with their company may not. Some of those benefits include:

  • Structured wages
  • Family and medical leave
  • Health insurance
  • Overtime
  • Workers’ compensation
  • Unemployment insurance

Sometimes a worker may offer services under substantially the same conditions as a hired employee, but remain classified as an independent contractor. Some of the criteria that contribute to that determination are the location of work performed, how work projects are developed and controlled, how well integrated the services offered by the employee are to the company, along with other factors.

While workers wrongly classified as independent contractors miss out on social net and other benefits, employers who misclassify employees usually benefit. Among liabilities employers do not have to pay for gig workers are health insurance premiums, payment and withholding of social security and unemployment benefits, or workers’ compensation premiums.

Although it is not difficult to classify an employee as a gig worker, the arrangement may turn sour if the worker applies for unemployment or is injured and seeks workers’ comp benefits. While many workers are afraid to speak up about misclassification, some inequities are coming to light as stimulus programs are developed to offer paycheck and unemployment support for certain types of employees.

Employers who wrongly classify employees may face new heat when furloughed and laid off workers seek stimulus payments to which they believe they are entitled—only to learn their employer has misclassified their status.

In an employment tax dispute, business owners who misclassify workers can be liable for past and current employment taxes and payments that should have been made on behalf of a properly classified employee. The IRS will work with an employer to evaluate the basis upon which the misclassification occurred—but considerable taxes may still be due.

Best bet? Make sure your employees are properly classified. If you use independent contractors, steer clear of the financial and project control that typifies an employee more than a 1099 worker. And if the IRS contacts you to discuss a payroll tax issue? Call a good tax attorney first.

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The Ups and Downs of Employment Leasing

employmentOutsourcing payroll functions can save business owners and operators time and money. Using vendor expertise lets employers focus on marketing their core strengths and customer fulfillment. For some companies, it is a good deal—and sometimes it isn’t.

A professional employer organization (PEO) is a company that handles personnel services for small- to mid-size companies. These businesses are called employee-leasing firms. With pricing based on the number of employees served, PEOs often provide services that include:

  • Benefit sourcing and service: With multiple clients, PEOs can source and provide benefits that might otherwise be out of reach to a small business. Health, vision, dental, and workers’ compensation programs can become affordable to employers using a PEO. Coordination of 401(k) and other pension benefits are also sometimes available through PEOs, saving entrepreneurs and owners the hassle of shopping and qualifying for affordable benefits for their workers.
  • Payroll and compliance services: Employee payroll, collection and pay over of employment taxes, coordination of vendor payments, and filing of regulatory records are an important service offered by PEOs.
  • Human resources: PEOs may offer recruiting and employee screening services as well as workplace safety and risk management consulting.

Due diligence is critical when considering a PEO, but there is more. Employee-leasing companies often come under extra scrutiny in any business community because the business model is often associated with tax fraud. Operating individually or as a network of affiliated companies, PEOs may operate respectably for a period of time—or the long term—before it is discovered that employment taxes withheld from workers, and taxes and premiums paid by employers have not been paid in full to vendors or turned over to the Internal Revenue Service (IRS).

The IRS may uncover the scam while the PEO is still operating. Oftentimes the company, or group of companies, has quietly wound-down with tax obligations still owing and criminal tax charges pending.

Unfortunately, business owners may discover they have a large payroll tax issue when the IRS seeks payment of past-due tax liabilities. A PEO could provide valuable services to your company. If considering an employee-leasing service, careful investigation of your vendor may keep you out of an IRS criminal investigation later.


Pyramiding—The In-Business Repeater

A pyramid is a stable, solid form. As a payroll tax scam though, it is pretty shaky.

pyramiding“Pyramiding” is a business model involving companies doing business for a relatively short period of time that collects employment taxes for its workers but fails to turn funds over to the Internal Revenue Service (IRS). When time runs out for the business as a going concern, the business files for bankruptcy to see its financial liabilities discharged. The owner operators then pack up and move elsewhere in the region, or in the country. This kind of scam is not to be confused with a multi-level marketing or pyramid scheme, although it is common for either a pyramid scheme, or pyramiding to result in criminal tax charges.

Another term for “pyramiding” is an in-business repeater, that is, people who stay in business, creating financial liabilities from which relief is sought in bankruptcy court, or which simply go unpaid. When the pattern is recognized, those involved may be charged with tax crimes—if they can be located.

A “repeater” is a discretionary term used by the IRS for someone with multiple tax liabilities. It is not often used for someone with tax problems who is trying to work their way out of a financial fix, but for those committing tax fraud in the form of wind-down and pop-up businesses.

Being an in-business repeater earns you special attention by the IRS. Once on your trail, the IRS usually stays there, waiting for your repeat business. The IRS usually closes in fairly quickly on repeaters with significant tax obligations, by seizing assets and commencement of other legal proceedings. As well, in-business repeaters are usually tagged with paying taxes they failed to pay previously, with substantial penalties.


Cash on Hand—Paying Under the Table Can Cost You

under the tablePayment in cash is easy and fast. Workers appreciate cash and it saves business owners money and hassle—in the short term. Paying cash under the table can also lead to prosecution for tax fraud.

How you structure your payroll is important, regardless of the size of your business. You may be a small business owner or the CEO of a large corporation with several revenue units. Large or small, payroll—and payroll tax—are regulated and require regular, accurate reporting.

There are a number of reasons that employers pay workers under the table, including:

  • Workers may not have documentation that would allow them to work in the U.S.
  • Paying employees in cash usually means that employment taxes are not taken out of the payroll, reported, and paid over to the Internal Revenue Service (IRS). Other times, workers have employment taxes taken out of their pay, but the money is not accounted for or rolled over to the IRS on behalf of the worker.
  • The same goes for businesses that are required to provide Workers’ Compensation benefits for employees. Payments made to employees may be made in cash, with no report or paystub to show withholding on their behalf. Eventually, inability to obtain Workers’ Comp benefits after injury or workers who are unable to show withholding taxes on their tax returns can trigger an IRS tax audit.
  • Employers or owners of struggling businesses may pay in cash to reduce short-term expenses or use withheld payroll tax revenue to pay their own personal expenses.

Regardless of whether you pay by cash or check, there are compelling reasons for collecting, accounting, and turning over appropriate payroll deductions to the IRS. While prosecution, fines, and loss of liberty can be abstract threats to a business owner trying to line their pockets or pay past-due bills, the Trust Fund Recovery Penalty (TFRP) is a focused, clear penalty awaiting those who fail their duty to pay over payroll taxes.

As we have discussed earlier, the TFRP is a tool used by the IRS to go after those responsible for collecting and paying over payroll taxes. The TFRP shreds the corporate veil and leaves the personal assets of a business owner vulnerable to seizure for past-due amounts owed on workers whose tax obligations were not lawfully paid over.

The scenes of a worker signing an “x” in the payroll book in return for weekly cash pay exists only in the movies. As a business owner or operation, understand your payroll responsibilities and your payroll tax obligations. Avoiding payroll taxes by paying in cash can be one of the most expensive decisions you ever make.

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PART IV: Precautions and Preparations

What if the IRS Reaches Out to Your Business: Understanding Civil Tax Audits

IRS auditWhen the Internal Revenue Service (IRS) is interested in your business, the result could be a civil tax audit.

Even if you know you have nothing to worry about, you might be concerned about receiving a friendly letter from the IRS suggesting that you sit down for a talk while providing a few years of your tax documents for review. To be clear, COVID-19 has changed a lot of things. The likelihood of any in-person IRS tax audit, or any tax audit for that matter, is diminished. During the lull, it is a good idea to brush up on why the IRS might be curious about your financials—and what they might do about it.

As we have discussed before, there are a couple of ways you could land on an IRS audit list, including:

  • The IRS develops formulae against which taxpayer data is driven. Your return might fit a pattern, not fit a pattern, or simply be a “calculated” random choice.
  • Your current or past returns may not fit an expected pattern, leading to your return being set out for review. You may have experienced a significant rise or drop in income, or again, software may identify an irregularity in your current return.
  • If you are an investor or associated with a company or group of businesses that are under audit, your business and personal returns may be pulled in simply because you are associated with that cohort. Not exactly guilt by association, but not far from it.

If you are selected for an audit, the IRS will contact you via mail with directions about an audit. An audit can be performed by mail and that mode is likely to pick-up steam in the future. If you are contacted by telephone about an audit, do not reveal any information but politely ask for the name and telephone number of the caller. The IRS states they will not start a taxpayer audit by telephone.

The letter you receive should list out documents they would like to review, both hardcopy and electronic. Most of the time, audits are limited to the past three years of returns.

If you receive an audit letter from the IRS, read it carefully, and then contact an experienced tax attorney in your area. Legal counsel will help you respond on time with appropriate documents. Seasoned legal help can help keep the process smooth and uneventful, especially if you have a complex return or considerable wealth.

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What Exactly Does “Getting Caught” Mean for a Business Owner and Their Business?

An important point to remember about failure to pay over employment taxes is the fact that it is personal. The individual or parties responsible for collecting and paying the taxes can be swiftly held personally accountable.

If you are the person with the responsibility to withhold payroll taxes, you will know that collected monies are held in trust until the sum is paid over to the government. If that money is intentionally diverted away from the IRS, to pay business or personal expenses, the IRS can pursue you (and your personal assets) for the amount of the unpaid taxes. The same thing goes if you delegate your responsibility to another to collect and pay over the taxes. If the taxes are not paid, you are on the line for the money not paid, along with the employee who failed to pay them over.

When the diversion of employment taxes becomes known, the IRS can assess a trust fund recovery penalty (TFRP). The penalty is based on the amount of the unpaid trust fund balance. Depending on the length of the tax fraud that led to the IRS investigation, the penalty can potentially bankrupt a business and lead to criminal charges.

As employment taxes belong to the government, failing to pay them over, or failing to pay the TFRP can lead to charges of tax crime. Willful failure to pay over federal taxes is a felony with a price tag of $10,000 in fines, five years in prison—and the balance due on the TFRP.

Payroll taxes are tempting and easily filched. If you are aware of gaps in your employment tax payments, seek advice from a tax attorney experienced with criminal tax defense. If you are considering borrowing some of those payroll taxes—just for just a little while—remember you may end up paying for that private loan for years to come.


One Way to Avoid Tax Mismanagement: Early Interaction Initiative

payroll taxesOne of the potential danger zones for business owners can be found in the collection and payment of payroll taxes. Far too often, owners of small businesses find that they fall behind on their bills and are tempted to use employment taxes to temporarily tide them over until things improve. There are a number of problems with this tactic, not the least of which is that the Internal Revenue Service can hit employers hard for the violation, assessing interest and penalties on top of the taxes owed.

Employment tax mismanagement can, in some cases, even result in criminal charges. Now the IRS says it is starting a new program—the Early Interaction Initiative—to identify employers in danger of falling behind on payroll taxes, and then help them to stay in compliance.

According to Accounting Today, the IRS says its guidance to employers will arrive in several forms, including letters and phone messages, and sometimes delivered in person by an agent. As many Cleveland business owners can attest, when an IRS officer knocks on your business door, it is time to have a discussion with a tax attorney.

While agents will invariably seem to be helpful, the reality is that a visit from a cash-strapped federal agency is not an occasion to chat. Take the agent's card, thank the agent for their time, but politely decline to discuss matters. Then give the card to a tax lawyer--someone who knows not only how to protect your rights, but also how to represent you in hearings, seizure procedures and other matters with the IRS.

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Three Tips for Defending Against Allegations of Employment Tax Fraud

Avenues of response are important if the Internal Revenue Service (IRS) suggests you have a payroll tax issue.bigstock-Male-Notary-Lawyer-Or-Judge-Co-349345933

Along with the Tax Division of the Department of Justice (DOJ), and the Offices of U.S. Attorneys, the IRS places a high priority on pursuit of employment taxes. According to the DOJ, employment taxes make up approximately 70 percent of revenue collected by the IRS. Unpaid employment taxes represent a sizeable amount of the U.S. Tax Gap.

While business operators, owners, or managers may consider the money collected from their workers as theirs until it is not—taxes withheld from the paycheck of an employee belong to the government. Robust pursuit of those taxes is a priority of the IRS. If you are in arrears on your payroll taxes, it is not unreasonable to expect that you will one day receive a letter from the IRS inquiring about the deficit.

Investigation into employment tax disputes can occur on the federal or state level. If the IRS inquires about your payroll tax calculations or the whereabouts of your payments, your initial response can set the tone for the potential civil or criminal tax investigation that may be ahead.

Whenever you hear from the IRS, your first action should be to contact a tax attorney with significant, successful experience working with the IRS. Perhaps there were accidental miscalculations of your payroll deductions—or you may be skimming the wage withdrawals owed by your company. Regardless of the backstory, when you have the attention of the IRS, guidance is needed from counsel who can help you navigate the road ahead.

Tips to consider if you are facing allegations of a tax crime include:

  1. Mistakes were made: An important component of a criminal tax charge is the willful and knowing conduct of the defendant. You may have underpaid taxes, withheld inappropriate amounts, or other error. Perhaps the individual responsible for withholding payroll taxes did not fully understand the process of pay over. A mistake does not constitute criminal conduct—but it will not excuse amounts owed plus fines.
  2. Avoiding taxes is not illegal: There are a number of perfectly legal means to avoid—not evade—payment of employment taxes. For payroll, there could be a worker classification dispute, or your employment tax collection and submission to the IRS could be completely outsourced. By working carefully through your process and calculations, you may be able to show there was no intent to evade your responsibility, due to honest mistake or possibly no mistake at all.
  3. Reliance on bad advice: It is important to deter the notion that you willfully provided false information to the IRS. If you engaged and relied on an accountant or other professional to manage your payroll, you may have unknowingly provided inaccurate information—or mistakenly interpreted the information you were given.

The aim of your response to the IRS is to halt, defer, or mitigate a potential criminal tax investigation.

The Trust Fund Recovery Penalty—What is it?

A Trust Fund Recovery Penalty is used by the Internal Revenue Service (IRS) to ensure the timely and appropriate payment of employment taxes.

The withholding and payment of employment taxes is a routine business operation. Anyone who has received a paycheck knows employers are required to turn over part of your pay to the IRS in the form of Social Security, federal income, and Medicare taxes. When they see the deduction on their pay stub, workers know their employer is depositing their taxes with the IRS. This keeps employees straight with the IRS and makes contributions to future Social Security and other benefits when needed.

TFRPTo make all this happen, the employer must collect and turn the taxes over to the IRS. We have discussed employment tax disputes before. These problems arise when a business owner or employee with bookkeeping or financial control withholds taxes from workers, but does not pay the money over to the IRS. 

There are a number of reasons individuals fail to turn over funds to the IRS. A struggling business owner may use employment taxes to pay creditors to keep the business afloat, fully intending to pay back the money. Other business owners see the withholding fund as a means to pay personal expenses or boost their quality of life. Regardless of the reason that withheld money is not paid over to the IRS, it is illegal. When the IRS gets wind of it, a Trust Fund Recovery Penalty (TFRP) comes into play.

The TFRP as an enforcement tool

The TFRP is basically intended to deter responsible individuals from failing to carry out their duty to collect and pay employment taxes over to the IRS. A TFRP is a serious threat because it can be enforced against an individual, whereas many employment-related actions are usually protected by the corporate veil.

Here are TFRP basics:

  • The amount of the TFRP is the amount of the income taxes that were not paid. It also includes the employees share of unpaid FICA taxes. Thus, the TFRP makes an individual responsible for the amount that the company did not pay over to the IRS, plus their own tax obligation.
  • The IRS process for collecting the TFRP includes identifying the individual responsible for collecting and paying over the taxes and who willfully fails to do so.
  • The individual responsible for paying the taxes can see their personal assets seized to pay the obligation.

The TFRP is an effective tool used against individuals who are responsible for paying over employment taxes to the IRS. If you are a business owner or controller aware of irregularities in your payroll tax payments, speak with an experienced tax attorney sooner than later.

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Start Off on the Right Foot: Payroll Tax Tips for Business Start-Ups

tax tipsThere seems to be a million details for entrepreneurs to attend to when starting up a new small business. One of those deserving attention before opening the doors of your commercial venture is payroll. Many a business that has come before yours has gotten themselves into trouble with the IRS over payroll tax issues. You certainly want to be sure to get a handle on any potential risks before opening day.

Before you hire any employees, it makes sense to set up a payroll system that will help you to take care of your obligations to your business, your workers and the Internal Revenue Service. Failure to withhold payroll taxes or to remit withheld taxes can quickly turn the American dream of business ownership into a nightmare. An online small business publication urges entrepreneurs to take steps to “protect you from incurring expensive IRS penalties."

The first bit of advice from Small Business Trends is to get an EIN. The employment identification number (or employer tax ID) is an absolute must-have, enabling you to report taxes and more to the IRS. Simply contact the agency to obtain an EIN.

Also crucial: Figure out whether your workers will be employees or independent contractors. While it might make financial sense to have contractors doing needed tasks, you don't want to arrive at a spot later where the IRS determines that those contractors were actually employees misclassified.

Of course, once you have a payroll system up and running, begin filing required tax reports to the IRS and other authorities. Again, failure to collect the taxes and pass them along to the IRS can result in significant penalties, and in some cases, criminal charges. Taking care of these matters before problems develop can spare you the expense and headaches of employment tax problems requiring the assistance of a tax attorney.

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Tips to Protect Yourself from Employment Tax Fraud

Diverting employment taxes is easy—but how do you protect your business and prevent an employment tax dispute with the Internal Revenue Service (IRS)?

In a business of any size, employment tax collection and pay over to the IRS is an important responsibility. Depending on your business or corporate structure, responsibility for payment of employment taxes may land in the finance department, a sole accountant, or an outsourced vendor. Regardless of your business operation, you are responsible for the money owed to the IRS.

Some business owners are deep into deliverables, growth strategies, and staying afloat amid competition. Backroom operations like payroll are easy to delegate. In Ohio and elsewhere, the IRS expects employers to accurately report on income and taxes withheld. Turning over employment taxes to the IRS is part of that. Consider these tips for keeping your books and payments to the IRS above board:

  1. Clarity: Classify and onboard employees properly. Misclassification of employees as contractors who are operating as employees is a quick tip-off that there are systemic business problems. Employee misclassification is a form of tax evasion. Whether you onboard your employees or use a service, be sure you can defend your classification.
  2. Maintain process: Payroll accounting can be complicated. Employees without adequate training may not have the expertise and current understanding of regulations to handle the job. The individual, team, or vendor you put in place to manage your company finances and withholdings have direct impact on the viability of your company and your ability to respond without fear to an IRS audit. In short—be sure you can trust the people handling your money.
  3. Checks and balances: Put checks and bounds in place to avoid payroll tax fraud. Appropriately restrict access to your accounting function and spread responsibility for different payroll functions between personnel. Choose your payroll accounting system software carefully and use alerts to track inconsistent or suspicious activity. Digital time-keeping should be part of the system to avoid payroll errors and collusion between employees and finance personnel in padding hours. Overall, ensure your process is being routinely reviewed and you are signing off on at least monthly reports that your operations are clean.

There is little to no defense for a business owner who claims they delegated their employment tax function to an employee or vendor. The IRS can apply a trust fund recovery penalty (TFRP) against the business owner and anyone in the organization who is responsible for paying withholdings but willfully fails to do so. With a TFRP, your personal income and assets are not protected if the IRS chooses to go after you.

Collection and remittance of payroll taxes is an important function for any business. Failure to account for employee withholdings has long-term consequences for the business owner, the business, and the employees whose social security benefits depend upon those payments.

Watch Out for Whistleblowers

A tip concerning tax fraud or a tax crime to the Internal Revenue Service (IRS) can pay dividends to whistleblowers. How does that work?

whistleblowerTo the IRS, whistleblowers provide credible tips or information that leads to collection of money owed to the U.S. Treasury. As you might guess, it involves more than a rumor or something someone heard. Vague commentary and hearsay do not guarantee a payday from the IRS.

Since implementation of the program in 2007, the IRS has paid over $931 million to whistleblowers who enabled the agency to collect $5.1 billion in tax arrears. That is not chump change. According to its latest report, the IRS paid approximately $120 million to whistleblowers in 2019, on the collection of $616 million that would have otherwise gone uncollected.

It makes sense that the IRS payment schedule for whistleblowers is structured to provide a higher award to those who provide information that leads to higher recovery. In the higher bracket, the IRS pays 15 to 30 percent of the amount actually collected. The break point is about at a $2 million threshold.

For information that results in collection of lower amounts, whistleblowers are paid a discretionary award of approximately 15 percent up to $10 million. This is generally the case when a taxpayer in arrears earns $200,000 or less each year in gross income.

Protecting whistleblowers

In 2019, the Taxpayer First Act went into effect. Part of the law made it easier for the IRS to communicate with potential whistleblowers. It also enables the agency to offer protections in exchange for information that might lead to a criminal tax investigation or uncover a tax controversy. The legislation makes it harder for employers and other entities to retaliate against someone who notifies law enforcement—or the IRS. The law aims at making a person who has suffered retaliation “whole” through measures that include

  • Receipt of back pay at double the usual rate—with interest
  • Award of attorney and other litigation event fees
  • Job reinstatement
  • Special damages for impact to reputation or emotional well-being

There are bone fide reasons for whistleblowers to pull the plug on criminal tax matters. Being a whistleblower comes at a cost and can pay a certain dividend if the information is legit and helps reduce that tax gap between compliant and non-compliant taxpayers.

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PART V: Recent Employment Tax Scam Stories

Payroll Tax Crimes Examples

tax crimePayroll taxes fund government programs and agencies. The Internal Revenue Service (IRS) shows no signs of slowing down when it comes to initiating and prosecuting employment tax disputes.

In late June 2020, two owners of three fast food restaurants in Ohio were sentenced to two and three years of probation respectively. They will also pay more than $500,000 in restitution for failing to pay over employment taxes. For a two-year time period, the two neglected to pay $346,773 in employment taxes to the IRS. As we have discussed before, not only can holding on to payroll taxes have a negative impact on your personal liberty, it also creates a shortfall for employees who believe the money coming out of their paycheck is paying their tax own liabilities.

In this case, a Special Agent involved with the IRS criminal investigation noted, “Employers who chose to not play by the rules create an unfair competitive advantage over those that do, they are not only cheating the system and their employees; they are cheating future generations relying on those taxes to help build the future.”

Also in late June 2020, a New Jersey business owner pled guilty to tax evasion and employment tax charges when engaged in a plethora of problematic financial behaviors including failure to file federal tax returns, cashing out business proceeds, and paying employees off the books. Ultimately the defendant failed to pay over $213,000 in payroll taxes.

The man admitted to using his business account and the excess proceeds to pay his mortgage, life insurance, credit card, and other personal expenses. He faces ten years in prison plus fines and probation when sentenced this coming December.

At just about the same time in Greensboro, North Carolina, a business owner was sentenced to 18 months in prison for embezzling payroll taxes from her staffing agency. The catch in this case is that the owner was the subject of a criminal tax investigation for failing to pay employment taxes in 2015. Upon conviction, she served prison time. When released, the woman restarted her business and her payroll tax scheme. Not surprisingly, she was again accused of criminal tax fraud to which she pled guilty. When she walks out a free woman from this stint, she will be on probation for three years and owe more than $2 million in restitution. Ouch to all.

Common thread? Payroll tax schemes oftentimes do not pay. Common mistake? Yielding to the siren song of easy cash and failing to contact good criminal tax defense when they had a chance to make a difference.

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Example of Failure to File

It is less than an hour's drive from Cleveland out to Portage County. The area is home to the Village of Garrettsville, known for its maple syrup and pastoral setting. It is also the hometown of Jonathan M. Lawrence, the CEO, founder and president of Laurenco Systems of Ohio, LLC.

Lawrence built the waterproofing company based in Leavittsburg. He was sentenced in U.S. District Court for the Northern District of Ohio to spend 6 months in prison for failing to submit to the Internal Revenue Service nearly $350,000 in taxes withheld from employee paychecks.

Following his release from federal prison, Lawrence will spend 6 months under house arrest, Judge Sara Lioi ordered. She also ordered him to pay $160,000 in restitution, in addition to the $140,000 he has already paid the IRS.

A federal prosecutor said the government "will continue to prosecute people who violate their tax obligations and their fiduciary responsibilities to their employees."

The IRS says on its website that it has an arsenal of weapons to deploy against employers who fail to remit withheld payroll taxes (federal income tax withholding, plus Social Security and Medicare taxes and unemployment taxes), including audits and tax liens. In some situations—cases in which the IRS believes the employment tax non-compliance is willful—criminal prosecution is a real possibility.

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A Picture of Several Tax Fraud Schemes Rolled Into One

arrested for tax fraudA San Jose police officer recently found himself charged with a host of serious criminal tax charges. The man, 47-year old Robert Foster, was a polygraph operator with the San Jose Police Department. Mr. Foster was not charged with any crimes surrounding his employment, but rather in his capacity as the owner of a business about which his employer had no knowledge.

Along with his wife and eight other individuals, Mr. Foster ran Atlas Private Security, a business interest that provided security guards and polygraph services to local area companies. The business was apparently successful enough that Mr. Foster and his cohort began to take liberties with state and federal regulations involving workers’ compensation and payment of state and federal taxes. The criminal tax investigation into the business found Mr. Foster funneled $8.9 million dollars in payroll away from the business to create a payroll tax liability of $578,716.56.

Just some of the felony charges with which Mr. Foster and his associates are charged include:

  • Insurance fraud
  • Criminal payroll tax issues
  • Unemployment insurance fraud
  • Money laundering
  • White collar crime enhancement
  • Wage theft
  • Paying employees under the table
  • Maintaining inaccurate payroll and headcounts and more

While these are all fairly routine white-collar tax crimes, the breadth of the charges is significant. Overall, the company laundered over $18 million and also threatened with deportation one employee who was investigating her options for workers’ compensation benefits.

Scheduled to be arraigned in November of this year, Mr. Foster and others involved face prison time if convicted on more than 40 felony charges. This troubled scenario underscores an urgent message for business owners who may currently be engaged in questionable payroll tax practices, or even those with offshore tax investments on which an FBAR report may not have been filed for several years.

 Mr. Foster illustrates what occurs when you do not obtain good legal advice early enough in the cycle to impact the initial outcome. Good legal defense may yet help Mr. Foster find a lower impact end-game than he is currently facing. For the rest of us, the story reminds us to get good legal advice sooner than later.

Understanding Tax Fraud


What Happens Once You’re Caught—Supermarket Owner Convicted of Tax Fraud

supermarket owner caughtSome business owners may think it’s okay to skim some of their income from off the top, and then come tax time, move funds around. It’s their money, right? However, they typically discover it was not a wise decision because it often results in a serious tax controversy. For example, earlier this month, a grocery-store owner from Parma, Ohio was sentenced for filing false tax returns—doing exactly that.

From the Department of Justice Press Release:

"U.S. Attorney Justin Herdman announced today that Mohammad H. Mohammad, age 56, of Parma, was sentenced to 5 years of probation and ordered to pay $489,189.00 in restitution and a $100,000.00 fine.

According to the indictment, Mohammad understated his income and failed to report gross receipts or sales generated by the business operations of Muhammad Brothers Partners for calendar years 2012 and 2013. In total, Mohammad under-reported his income by $498,189.00, court records show. Mohammad, along with his brother, established Muhammad Brothers Partners, which, in turn, owned and operated Holyland Supermarket, a grocer in the city of Cleveland. "

What's interesting though is that this is not the first time Mr. Mohammad has used his grocery store business in a questionable manner. Back in 2017, Mohammad, along with his two brothers, was charged with operating a multi-million-dollar food stamp fraud conspiracy. The Department of Justice Press Release elaborates on the charges.  


Hard Labor—UAW Chief Pleads Guilty to Tax Crimes

plead guiltyBig Labor has spent decades fighting a reputation for dealing under the table. A recent guilty plea by the former president of the United Auto Workers Union (UAW) is going to keep that assessment intact as a federal investigation continues to pull in high-level union officials.

In early June, 2020, Gary Jones, former UAW president pled guilty to conspiracy counts for tax fraud, evasion, and racketeering. Mr. Jones has agreed to fully cooperate with federal authorities in the hopes of receiving a more lenient sentence in October of this year. Without the cooperation agreement, Mr. Jones faces a maximum of ten years in prison and a sizeable fine.

What happened? The federal-level investigation into the UAW is now in its fifth year and still rolling. In addition to Mr. Jones, the criminal tax investigation has ensnared executives from Fiat Chrysler and at least a baker’s dozen of senior union officials. Some of the back-office revelations in this case include:

  • Jones and six other union officials admitted to embezzling at least one million dollars from the union for an array of personal expenses including travel, accommodation, liquor, meals, golf, and clothing. In other words, perks.
  • According to The New York Times, Mr. Jones spent $60,000 on cigars and accessories during his tenure as an officer for the UAW.
  • Like many people charged after an IRS criminal investigation, downfall is owed to the fraudulent tax returns that must be filed to cover up income that is impossible to explain. In this case, Mr. Jones is forfeiting $140,000 of the money he pilfered from the organization that he led.

Despite the grandiose behavior of Mr. Jones with the money of others, authorities continue to pry up and expose related deals involving endorsements, home-improvement, and vacation homes built by and for other union officials. It is likely the testimony of Mr. Jones will hasten the light of day on some of these dealings.

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Extreme: $10 Million in Past Due Employment Taxes

taxes past dueA Miami business man will spend two years in prison and still owe a tax bill of almost $10 million. There has to be a better way.

Employment taxes are one of those can’t-really-be-avoided aspects of operating or owning a business. As we have discussed, employment taxes are collected by employers to fund an array of programs maintained by the federal government. These include federal income taxes, Social Security, Medicare, and unemployment taxes.

When employers fail to pay taxes to the Internal Revenue Service (IRS), they usually forego payment of all of these program taxes. Regular employment taxes represent a significant portion of taxes collected each year by the IRS to fund federal programs. The IRS robustly reinforces regulations around payroll taxes, pursuing employers and employees who unwittingly fall into non-compliance when their employer withholds their due share of these taxes.

Our firm is focused on tax law and helping clients work through sticky situations like IRS audits, criminal tax investigations, and employment tax disputes. We work frequently with business owners who used payroll taxes to ease a stressed bottom line or to fund lifestyle pursuits. The case of Ricardo Betancourt offers a cautionary tale.

Mr. Betancourt owned several businesses in the South Florida area that provided package delivery service. The businesses were successful, pulling in about $100 million per year in gross revenues. The business employed hundreds of workers. Had Mr. Betancourt properly collected and turned over payroll taxes to the IRS, this story would be one of good businesses decisions and a well-earned fortune. Unfortunately, as often happens in these matters, one or two poor choices can snowball, altering the trajectory of a seemingly successful career.

For reasons unknown, starting somewhere around 2009, Mr. Betancourt ceased to turn over his employment taxes to the IRS. After starting down that road, Mr. Betancourt neglected his payroll taxes until 2016, undoubtedly after the launch of an IRS criminal tax investigation.

Already successful in business, Mr. Betancourt used the approximately $10.8 million he withheld from his employees to fund a bucket list of classic cars, Harley-Davidson motorcycles, expensive baubles and payments for plastic surgery.

For the tax crime, Mr. Betancourt will do the time—24 months to be precise, and he will be paying almost $10 million in restitution and penalties, plus probation.

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Embezzlement from Deceased Client’s Estate

We previously published an article that shared the story of a New York attorney that had been charged with funneling $3.5 Million from his deceased client's $35 Million estate through fake charities. He recently plead guilty to these crimes of conspiracy and tax evasion. Here are the details

From the U.S. Department of Justice press release:

“The fiduciary duty that a lawyer owes to a client is paramount to the practice of law,” said Principal Deputy Assistant Attorney General Zuckerman. “The Justice Department will prosecute and seek just punishment against any attorney who victimizes their clients for their own personal gain.”

“As he admitted in court today, Steven Etkind violated the law, the canons of his profession, and the trust of his client by stealing more than $3.5 million from the client’s estate,” said U.S. Attorney Berman. “Etkind now awaits sentencing for his crimes.”

According to court documents and statements made in court, Steven M. Etkind was a partner at a New York law firm’s tax, trusts and estates group and a Certified Public Accountant. Etkind performed legal work for a successful entrepreneur client, who passed away in 2008, naming Etkind as the co-executor of his $35 million estate.

The client’s will directed the creation of two charitable trust private foundations, funded with assets from the client’s estate, for the sole purpose of donating to 501(c)(3) charitable organizations, including those aimed at assisting Jewish-sponsored organizations. Etkind was named co-trustee of these trusts. 

Beginning in 2009, Etkind and his co-conspirator set up a phony charitable organization, the United Jewish Education Foundation (UJEF), and used it to steal more than $3.5 million from these charitable trusts. As part of the conspiracy, Etkind directed that donations from the trusts be first made to legitimate Jewish charitable organizations in order to give the disbursements the appearance of legitimate donations. Etkind and his co-conspirator then redirected the funds to accounts of UJEF, the phony charity that his co-conspirator controlled. 

Etkind subsequently directed his co-conspirator to write checks, totaling $327,500, to a bank account in the name of JE Capital Holding Corp., a nominee corporate entity that Etkind controlled exclusively. Etkind further directed more than $3 million to be used in 2010 to purchase a 6,300 square-foot home with a swimming pool in Southampton, New York. The Southampton property was purchased for the use and enjoyment of Etkind and his family. Etkind later transferred title of the property to JE Trust, a nominee trust he controlled. 

To conceal his embezzlement, Etkind filed, and caused to be filed, fraudulent personal, corporate, and charitable trust returns with the Internal Revenue Service (IRS).  During the course of a subsequent audit of UJEF by the IRS Tax Exempt & Government Entities Division, Etkind and his co-conspirator made several false and misleading statements, including about the true ownership of the Southampton Property.         

United States District Judge John G. Koelt scheduled Etkind's sentencing for January 18, 2019. Etkind faces a statutory maximum sentence of five years in prison on the conspiracy charge and five years in prison for tax evasion. He also faces a period of supervised release, restitution, and monetary penalties.


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Results of Paying Under the Table

cheesesteakMany people get caught up in allegations of tax fraud. Recently, the king of Philadelphia Cheesesteak and his son were indicted for filing false tax returns and other criminal tax charges.

Take a hoagie, stuff with thinly sliced steak and cheese, toast until the bun is crusty, the steak is steaming and the cheese is melted, and top with anything you like. Tony Luke’s, a South Philly eatery owned by Anthony Lucidonio Sr. and son, Nicholas Lucidonio, is a famous local sandwich shop known for its cheesesteak. Unfortunately, it is not only the hoagies getting toasty these days, as the two owners were charged in late summer with cooking the books—keeping two sets of books that may have concealed as much as eight million dollars in receipts from the Internal Revenue Service (IRS).

Altogether, 82-year old Mr. Lucidonio Sr., and his son, 54-year old Nicolas, face more than 20 counts of criminal tax fraud.

We talked earlier about the problems that can rise when paying cash under the table, that is, cash paid without report to the IRS or payment of payroll taxes. The IRS alleges the duo kept two sets of books. In one set, they recorded, reported, and paid over employment taxes on a portion of their earnings from their business. The pair then paid employees a substantial amount more in cash—without withholding employment taxes or reporting the income. The accountant retained by the pair was directed to prepare false income tax returns and quarterly business returns.

Of the indictment, the U.S. Attorney General working on the matter, William M. McSwain, stated, “Tony Luke’s is an iconic Philadelphia brand, but that is not what matters in the eyes of the law. These are serious allegations and it should go without saying that everyone has an obligation to follow the law. This alleged scheme victimized honest taxpayers in two ways: first, by hiding more than $8 million in revenue from the IRS and second, by avoiding payroll taxes.”

The scheme apparently ran from 2006 to 2016, with a burp in 2015 when the pair were engaged in a courtroom franchising and recipe disagreement with Tony Luke Jr., also a son of Mr. Lucidonio. According to the indictment, Anthony and Nicolas were concerned legal troubles might shed light on their activities, so 2015 returns were doctored to report more income—and also included fake income tax deductions to offset the increase in income reported.

If convicted, father and son face years in prison, extensive fines, and probation. Although facing serious tax charges, they are presumed innocent until found otherwise. Whether you make a million dollars making sandwiches, steel, or in financial transactions, if you become embroiled in an IRS criminal tax investigation—speak with an experienced tax attorney for help mitigating the impact of charges that may be pending against you.

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Concerns or Questions? Contact an Attorney at Our Tax Law Firm