CHICKEN OR EGG? (TAX EVASION OR IMMIGRATION VIOLATION?)

How much money do U.S. employers pocket for themselves that’s worth evading tax laws and hiring undocumented workers?

From coast to coast, U.S. restaurant owners have been accused or convicted of tax avoidance schemes that violate immigration laws. The most recent cases are in Massachusetts (seeUnited States v. Khan, D. Mass., No. 1:16-cr-10238 (indictment Aug. 18, 2016); United States v. Khan, D. Mass., No. 1:16-cr-10111 (indictment Apr. 14, 2016)) and California (seeUnited States v. Ritdet, N.D. Cal., No. 3:14-cr-00215 (plea entered Aug. 17, 2016); Leslie Book, Tax Crime Snapshot: Ministers, Congressional Staffers and Restaurant Owners, Procedurally Taxing Blog (Aug. 25, 2016), http:// http://procedurallytaxing.com/tax-crime-snapshot-ministers-congressional-staffers-and-restaurant-owners/). Each case involved employers who were indicted for willfully failing to pay the IRS the required income and employment taxes resulting from their restaurants’ activities. Instead, these employers pocketed those funds for themselves. Every indictment alleged that each employer intentionally employed immigrants without legal work authorization. 

The Khan cases involved a common tax scheme where U.S. employers illegally hired undocumented workers. Federal law requires employers, like Khan, to withhold from their employees’ pay their shares of FICA (employment) taxes and federal income taxes. Those employers are required to pay over to the IRS the withheld funds and the employer’s share of FICA taxes, along with any corresponding income taxes owed by the employer and associated business. Accordingly, Khan was required every year to submit to the IRS Forms 940, 941, W-2, and 1120. Also, all employers, including Khan, must abide by the federal immigration employment verification system for purposes of hiring non-U.S. citizens. Khan was accused of violating these tax and immigration laws through the following acts.

Khan owned several fried chicken restaurants in Massachusetts. Khan lied about his ownership and control over the restaurants. He significantly understated information to his tax preparers about employees, gross receipts, cost of goods sold, officer compensations, salaries and wages, and taxable income from his restaurants. This resulted in falsely prepared Forms 940, 941, W-2, and 1120. He also failed to issue accurate Forms W-2. Additionally, Khan paid employees in cash “under the table” and employed immigrants without legal work authorization.

Khan was indicted in multiple cases for conspiracy to defraud the IRS and willful failure to collect or pay over employment taxes. Each tax evasion plan involved employing undocumented workers at Khan’s restaurants, resulting in underreported and underpaid employment and income taxes. Those unaccounted-for amounts were secretly diverted to him. If Khan is convicted of harboring undocumented immigrants for profit, he potentially faces 10 years in prison and a $250,000 fine. On top of that, Khan is subject to five years in prison, a $250,000 fine, and payment of restitution for conspiracy or failure to pay taxes (seeRestaurant Owner Accused of Hiring Unauthorized Workers by Laura D. Francis, Workplace Immigration Report (Aug. 19, 2016)).

Similarly on the west coast in the Ritdet case, the Department of Justice announced that the owner of several restaurants in California recently pled guilty to corruptly endeavoring to obstruct the due administration of the internal revenue laws and to harboring illegal aliens for profit (see California Woman Admits to Hiring Unauthorized Workers by Genevieve Douglas, Workplace Immigration Report (Aug. 18, 2016)). Ritdet admitted to having willfully filed false individual income tax returns for tax years 2007 through 2011, and failing to disclose gross receipts, sales, and income received from her restaurants and rental activities. She also confessed to concealing her foreign bank account that had yearly balances over $10,000 (FBAR violations), and underreporting employment taxes owed for her restaurant employees who were paid in cash. One FBAR conviction alone exposes Ritdet to five years in prison and a fine of $250,000. Moreover, corruptly interfering with the IRS’s administration of the tax laws is punishable by three years in prison, a $250,000 fine, or both. 

What’s more is that Ritdet’s tax crimes involved immigration law violations.  She admitted to have knowingly employed immigrants without legal work authorization at her restaurants. Ritdet confessed to underpaying those employees and instructing them not to speak to anyone about their immigration status. Aside from her tax crime punishments, Ritdet faces 10 years of imprisonment for harboring undocumented workers for profit and could be fined $250,000. She is scheduled to be sentenced on February 22, 2017.

Cases like Ritdet and Khan showcase tax’s overwhelming influence over numerous areas of law: e.g., immigration, criminal, civil, human rights, and labor. The Department of Justice affirmed this effect in Ritdet, when Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Department’s Tax Division, and U.S. Attorney Brian J. Stretch of the Northern District of California, commended the U.S. Department of Labor, Wage and Hour Division, for identifying the underpayment of wages and overtime, as well as Special Agent in Charge Ryan Spradlin of U.S. Immigration and Customs Enforcement (ICE) Homeland Security Investigations, who detected the immigration violations (Northern California Restaurant Owner Pleads Guilty to Obstructing the Internal Revenue Laws and Harboring Illegal Aliens for Profit (DOJ press release Aug. 17, 2016)).

Furthermore, tax and immigration laws are typically topics of great importance during election season, and they certainly are now. Ritdet and Khan could help explain the realities of how tax and immigration laws can go hand-in-hand. These realities can occur in everyday communities, with small businesses, involving neighbors and possibly friends or family. Particularly, these situations don’t always involve the one-percent or huge conglomerations, and they don’t only occur in big cities.

Because tax and immigration laws can dominate the media outlets on a daily basis during election time, the following questions may need to be addressed in an effort to combat these illegal activities:

 

· Who is ultimately accountable for these violations? (Employers, employees, or both?)

 

· Are the responsible authorities consistently enforcing these laws? (IRS, DOJ, ICE, etc.?) Why or why not?

 

· Would there be undocumented workers if there weren’t U.S. employers willing to employ them?

 

· Typically, how much are these employers “saving” by paying employees “under the table” and below minimum wage?

 

· Generally, how much money in evaded taxes is diverted annually from the IRS to these employers?

Note: “Who is responsible” is not the same as “who is held responsible.” If accountability is as important as has been professed, then maybe these questions should be explored to determine the root of this problem and hopefully the solution.