Federal Tax Zapper Probe Snares Five Chicago Restaurants

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Michael J. Bologna

The Justice Department filed criminal tax evasion charges against the owners of five Chicago-area restaurants as part of a widening federal probe focusing on the use of cash register sales suppression software known as “tax zappers.”

John R. Lausch, U.S. Attorney for the Northern District of Illinois, said Aug. 9 that the owners of three Chinese restaurants and two Mexican restaurants willfully avoided paying federal and state taxes for at least six years through schemes utilizing tax-zapping software. Lausch didn’t reveal the scale of the fraud, but the charging documents allege the five business owners knew that their taxable gross receipts substantially exceeded the $12.4 million reported to federal and state revenue authorities.

Comments by senior officials with the Internal Revenue Service and the Illinois Department of Revenue suggest that the five criminal indictments, all dated Aug. 7, are a fraction of a much larger criminal sweep targeting cash-transaction businesses. A Justice Department spokesman told Bloomberg Tax the federal probe is “ongoing.”

“This is only the beginning,” Gabriel Grchan, special agent-in-charge of the IRS Criminal Investigation Division in Chicago, said in a statement. “I want to warn those restaurants, gas stations, convenience stores, and other establishments that are currently using or thinking of using sales suppression software, that we are on to you and your methods. If you steal from the federal government, there will be serious consequences.”

Illinois Revenue Director Connie Beard echoed those views: “Today’s charges should send a message that technology cannot shield criminals from being held accountable.”

Two Sets of Books

A recent analysis by Richard Ainsworth, a professor of tax law at the Boston University School of Law, estimated that the widespread use of sales suppression software robs states of up to $21 billion annually. He said the Chicago cases are important because there have only been a handful of criminal cases in recent years, and very few at the federal level.

“This is a significant law enforcement development because the IRS is going hand-in-hand with the state of Illinois doing these kinds of audits,” Ainsworth said.

Tax zappers are frequently integrated into a business’s point of sale system and used to delete selected sales, generally cash transactions. The systems then recalculate individual receipts and the taxes due. The process essentially creates two sets of books for the business owner.

In addition, tax-zapping systems can reorder all sales slips and adjust the internal ledger. This process informs the operator how much additional cash is in the register for removal at the end of the day. In many cases, restaurants use cash withdrawn from registers to pay staffers under the table.

Five Defendants

The Justice Department filed multiple-count indictments against Shuli Zhao, the owner of Katy’s Dumpling House in Westmont, Ill.; Chun Xu Zhang, the owner of Sushi City in Downers Grove, Ill.; and Quan Shun Chen, the owner of Hunan Spring in Evanston, Ill.

In addition, the government filed criminal informations against Sandra Sanchez, the owner of Cesar’s Tacos on North Clark Street in Chicago, and Israel Sanchez, the owner of Cesar’s on Broadway in Chicago.

The action against Sandra Sanchez comes one year after Illinois Attorney General Lisa Madigan (D) announced similar criminal charges. On Aug. 2, 2017, Madigan alleged Sanchez used a zapper system between 2012 and 2015 to underreport $1 million in sales, cheating the state out of more than $100,000 in taxes. The case marked Illinois’ first prosecution under a 2013 law banning the use of sales suppression software.

The charging documents in the five federal cases gave only light descriptions of the alleged tax frauds committed by the defendants. The Justice Department spokesman wouldn’t disclose the scale of the tax avoidance.

But Ainsworth said defendants using zappers typically skim off 30 percent of their total receipts before presenting their books to revenue authorities. Under this scenario, the five restaurants likely withheld $3.7 million in cash sales, permitting them to evade about $1.5 million in state and federal taxes.

The case is United States v. Zhang, N.D. Ill., No. 18-cr-476, indictment 8/7/18.

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