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By Michael Baer
Old-fashioned tax fraud and embezzlement remain a focus for the Internal Revenue Service, even as increased attention paid to preventing identity and data theft, and agency staff cuts limit resources.
Owners of construction businesses that transported steel and sold gravel and concrete in West Virginia received prison sentences on Jan. 26 of 21 months and 27 months each for failing to pay more than about $1.4 million in employment taxes. The owners, a couple, used the funds to buy property and finance their horse farms, the IRS said.
A Tennessee business owner of a company that produced and installed check processing equipment was sentenced Aug. 19, 2016, to 12 months in prison, two years of supervised release and ordered to pay restitution of $10.8 million to the IRS after failing to pay more than nearly $9 million in employment taxes.
The fines and prison sentences for owners and officers of businesses that fail to pay employment taxes owed to the government cuts across industries and may include some payroll service providers. A prison sentence of 135 months was handed down in 2015 to a president of a North Carolina payroll service provider who defrauded at least 113 clients over six years, using some of the millions of dollars intended for payroll and employment tax payments for personal use, the IRS said. The company officer made false entries into the company's accounting system to make it appear as though the funds were used for legitimate client expenses in an effort to conceal his embezzlement, the agency said. He also was ordered to pay more than $17 million in restitution and sentenced to two years of supervised release.
As the IRS devotes more resources and attention to preventing taxpayer data from being stolen or compromised, the aforementioned recent convictions show that fighting the embezzlement of employment taxes remains high on the agenda.
These tax violations go beyond civil cases, which typically involve fines, penalties and the payment of back taxes.
The previously mentioned cases are among those that the IRS prosecuted recently that resulted in convictions with prison terms. The most recent government fiscal year, which ran from Oct. 1, 2015 to Sept. 30, 2016, was a busy one for the IRS Criminal Investigation (CI) unit. In fiscal 2016, the unit reported that the IRS successfully pursued prison sentences in 79.9 percent of criminal convictions. The agency investigated 3,395 cases during that period, with 2,672 convictions with average sentences of three years, five months. This is down from fiscal 2015, when there were 3,853 investigated cases, with 2,879 convictions. The average sentence for 2015 was two years, seven months.
The CI branch investigates tax, money laundering and Bank Secrecy Act laws and is composed of nearly 3,100 employees worldwide, about 2,200 of whom are special agents, the IRS website said.
The investigations unit works closely with the civil divisions of Small Business/Self- Employed, Wage and Investment, Large Business and International and Tax Exempt and Government Entities to get referrals for following up on criminal cases, according to the Criminal Investigation 2016 Annual Report released Feb. 27 . Tax examiners were trained to identify potential criminal activities that may be uncovered during audits and then to pass the lead to the investigations unit.
For crimes related to employment taxes, which IRS defines as involving federal income tax withholding, Social Security taxes and federal unemployment taxes, the IRS reported that jail time was assessed in 70.1 percent of the cases, with average sentences of 14 months for 2016. For 2015, IRS reported that jail time was assessed in 77.4 percent of cases for employment tax-related offenses, and the average jail time at sentencing was 24 months.
Illegal employment tax schemes may include illegitimate use of employee leasing, a business setup concept called pyramiding, paying employees in cash, filing false payroll tax returns and failing to file payroll tax returns, the report said. These methods commonly are used to evade employment taxes, the IRS said.
• Employee leasing fraud. Employee-leasing companies that fail to pay collected employment taxes to the IRS on behalf of clients commit fraud. Employers that contract with outside businesses to handle all administrative personnel and payroll concerns for employees may be vulnerable. In some cases, the tax amounts are spent by the employee-leasing company owners on business or personal expenses. “Often the company dissolves, leaving millions in employment taxes unpaid,” IRS said.
Owners of an employment agency that provided temporary labor to businesses in Massachusetts and New Hampshire were indicted March 22 for this type of tax evasion. The indictment claimed that the owners failed to pay employment taxes, cashed more than $11 million in client checks at a check cashing facility and used their staffing agency’s site supervisors, office manager and drivers to pay their employees in cash.
• Pyramiding. Businesses that withhold taxes from employees, but intentionally fail to pay those taxes are guilty of pyramiding, the IRS said. The money is used to pay off other debts or other purposes. After tax liabilities accrue, the individuals responsible then start new businesses and begin “to accrue a new liability,” the agency said.
In the case of the West Virginia couple previously noted, the owners “changed the name of the business several times, though the operations of the business remained the same,” the IRS said.
• Wages paid in cash. Paying employees in cash to limit records of employment is another illegal method of tax avoidance, IRS said.
The president of a specialty market who was responsible for hiring and paying employees decided which employees were paid through payroll, which involved withholding and paying federal employment taxes, and which employees were paid in cash, with no federal employment taxes collected or paid, the IRS said. Employees of the speciality market without legal status in the U.S. generally were paid in cash. The market's president failed to collect, account for and pay the $1,127,233 in federal employment taxes due on behalf of those workers, the IRS said.
The West Virginia couple also paid employees in cash to avoid paying employment taxes.
• Failing to file returns. Those who fail to file employment tax returns or prepare false payroll tax returns that understate the amount of wages on which taxes are owed also may be prosecuted as criminals, the IRS said.
An example of a conviction for this type of crime is a case from late 2014 that involved an owner of a Baton Rouge, La., health care company who pleaded guilty to failing to truthfully account for and pay over employment taxes. According to court documents, the owner withheld employment tax contributions from his employees, failed to file quarterly employment tax returns and failed to forward the taxes he had collected to the IRS.
The CI unit, which is the only federal law enforcement agency with jurisdiction over federal tax crimes, has seen staffing numbers fall in the past few years. This directly affects the number of investigations that are being performed, Richard Weber, chief of the IRS CI unit, said in the preamble to the 2016 Annual Report. There was a 4.3 percent decrease in the number of special agents at the conclusion of 2015 from the prior year, he said.
Despite the diminished resources, conviction rates attributed to CI for tax and non-tax financial and narcotics crimes came in at 92.1 percent for fiscal 2016.
CI will continue to “follow the money,” Weber said.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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