Some business owners mistakenly view paying workers under the table as a win-win proposition for all involved parties. They justify taking this action by stating that the employee receives “tax-free” money that boosts the employee’s income. They further justify this type of action by citing the company’s own apparent cost savings. Unfortunately, characterizing paying workers under the table to avoid employment taxes and workers’ compensation insurance costs is only a win-win in an extremely short-term mindset. In reality, both the business and the worker are hurt. The business and any responsible parties face exposure to long-term liability and the potential of a prison sentence for the tax fraud. The worker faces potentially serious consequences including ineligibility for Social Security benefits or workers’ compensation.
Unfortunately, some successful business owners focus only on short-term profits and do not account for the long-term consequences of employment tax fraud. In California, the Employment Development Department is an extremely thorough and aggressive investigator and prosecutor of payroll tax fraud.The IRS plays a similar role for the federal employment tax obligations, nationwide. In fact, the IRS recently identified and supplied evidence for the prosecution of a formerly successful and reputable business owner.
Richard Moxley was a successful owner and operator of the window and gutter cleaning business known as Sparkling Windows. The business was based in Watertown, Massachusetts. While the business appeared successful, that success was further augmented by a scheme devised and executed by Moxley to defraud both the IRS and the company’s workers’ compensation insurance provider.
To execute the scheme, Moxley paid workers for the company under the table and filed false tax returns to conceal this behavior. Moxleymanaged to pay workers under the table for a period of time by taking client checks to a check cashing business. He would cash the checks and then pay employees with the proceeds. Cashing client checks in this matter concealed a significant amount of revenues and payroll which were also falsely reported on business tax filings. Engaging in these actions allowedMoxley to evade income and employment taxes while simultaneously fraudulently reducing workers’ compensation insurance premiums.
Moxley pleaded guilty to charges related to these acts in a recent court proceeding. Moxley pleaded guilty to one count of tax evasion and one count of mail fraud before U.S. District Court Senior Judge Mark L. Wolf. Moxley is scheduled to face sentencing on August 17, 2016.
Some business owners seem to believe that the cash nature of their business gives them additionally leeway to commit tax and other types of fraud. It is not clear if Moxley’s business was cash intensive in nature, but home improvement and contracting businesses frequently are because these businesses often receive payments from clients in the form of cash. However, the IRS and state tax enforcement agencies, like the California Employment Development Department, arewell aware of the additional potential for abuse that cash presents. Therefore, these agencies have adopted policies and practices intended to identify and prosecute fraud in cash intensive businesses. In fact, the IRS Cash Intensive Businesses Audit Techniques Guide is publicly available on the IRS website. It provides auditors with a playbook to get to the bottom of tax fraud by owners of businesses of this type. Furthermore, the IRS and other agencies have whistleblower programs that reward employees and other individuals who report known tax fraud to the agency.
The crime of tax evasion and penalties that can be imposed on individuals convicted of tax evasion are set forth in 26 USC § 7201. Tax evasion is a type of tax fraud that involves a willful attempt to “evade or defeat any tax imposed by this title or the payment thereof.” Thus, tax evasion can be charged in two situations. The first is the willful attempt to defeat the imposition of a tax and the second is a willful attempt to defeat paying a tax that has been assessed.
Tax evasion is a felony and can be punished with a prison sentence of up to five years. In addition, individuals can be fined up to $250,000 while corporations can be fined up to $500,000. Furthermore, restitution of the amounts fraudulently obtained and responsibility for the costs of the criminal prosecution are frequently ordered.
The charge of mail fraud carries even harsher penalties. An individual convicted of mail fraud can face up to 20 years in federal prison. After serving the federal prison sentence, heor she is subject to up to three years of supervised release and significant monetary fines.
If you are considering paying workers under the table to reduce employee expenses and worker’s compensation costs, reconsider your actions. Furthermore, if you are considering cashing client checks off the books to pay employees, consider the potential penalties a formerly successful business owner now faces. If you have a history of doing just this, consider making a Voluntary Disclosure and potentially removing the risk of criminal charges before the noose closes, asa current witch hunt is on for this pattern of behavior.