The Department of Justice (DOJ) recently announced the sentencing of Massachusetts manufacturing CFO Robert A. Saltzberg, who pleaded guilty to five counts of filing false returns (“making and subscribing false returns”) in February 2019. Saltzberg, who served as CFO at the same company for more than a decade, exploited his position as a high-ranking executive “to embezzle more than $1 million from the company.” In the process, he also defrauded the IRS, taking willful actions to evade payment of U.S. income taxes. For example, to conceal the embezzlement, Saltzberg invented business expenses, which were then reported to the IRS on the company’s tax returns. These “expenses” created the illusion that the business earned less income than it actually did, which fraudulently reduced the company’s tax liability. Since the business was a flow-through entity (specifically, an S corporation), this understatement was consequently passed onto Saltzberg’s personal income tax return. By fabricating business expenses and concealing embezzled income, Saltzberg engaged in tax fraud – and as a result, has been sentenced to 24 months in prison.
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In 1998, Saltzberg became “CFO of a precision metal fabrication company in Franklin, [Massachusetts] of which he was a 50% co-owner,” according to the DOJ. He continued to hold this position, which he exploited to commit tax and financial crimes, through 2014. During this time – a period of 16 years – Saltzberg gradually embezzled more than $1 million from the company, which amounts to the theft of approximately $62,500 per year on average. By failing to report the embezzled funds on personal income tax returns – as some readers may be surprised to learn, the IRS requires taxpayers to report even illegally obtained income – “Saltzberg evaded paying more than $300,000 in federal taxes.”
Because of his role as CFO, a position in which he exerted “complete control over the company’s financial activities” along with its “books, records, and financial statements,” Saltzberg was able to embezzle corporate funds undetected for more than a decade. To mask his activities, he attributed the missing funds to necessary business expenditures, while in reality, spending the embezzled money on “personal expenses.”
To mislead the IRS and further conceal his actions, Saltzberg fed inaccurate information to the business’ corporate tax preparer, whom he repeatedly caused to file false returns from 2005 to 2014. Filing false tax returns, or making and subscribing false returns, is prohibited by federal law under 26 U.S. Code § 7206 (pertaining to fraud and false statements). Most offenses prosecuted under this statute, including Saltzberg’s, involve one of the following two sections: 26 U.S. Code § 7206(1), which bans filing false tax returns; or 26 U.S. Code § 7206(2), which bans CPAs and other tax professionals from helping others to file false returns. (For this reason, the latter is referred to colloquially as “tax preparer fraud.”)
Both offenses are punishable by the same criminal penalties, which are, in accordance with 26 U.S. Code § 7206, maximum fines of $100,000 and/or a maximum sentence of three years in prison. However, the aforementioned fine applies strictly to cases involving individual taxpayers, quintupling to $500,000 in certain cases involving corporations.
In February 2019, the DOJ reported that Saltzberg would face the statutory maximum of three years, along with maximum criminal fines of $250,000. However, criminal fines are separate from IRS or victim restitution. At sentencing, Saltzberg was given two years in prison, ordered to repay the IRS $342,000 for losses caused by tax evasion, and ordered to repay the company $1,360,000 for losses caused by embezzlement.
As noted above, the company was structured as an S corporation: a “pass-through” entity not subject to U.S. income tax. Instead of paying income taxes at both the corporate and personal levels (called “double-taxation”), as is required with C corporations, the shareholders of S corporations are taxed only at the personal level, paying taxes on their own shares of the company’s profits. (Indeed, this advantage makes the S corporation a suitable choice of entity for many California business owners.) Because S corporations are pass-through entities, understatements of corporate income translate to understatements of personal income, as the DOJ pointed out. For more information about the taxation of S corporations and other types of business entities, see our entity tax comparison chart, or ask our entity selection attorneys for assistance.
At the Tax Law Office of David W. Klasing, we are California tax attorneys with more than 20 years of experience representing business entities and individual taxpayers in state, federal, civil tax cases and a decade of experience with criminal tax cases. Whether you are searching for an IRS fraud defense lawyer to fight tax evasion charges, a corporate tax attorney to assist you with corporate tax compliance and planning, or a dedicated CPA to provide small business bookkeeping and accounting services, our award-winning team of tax professionals is here to provide support. We bring clarity to complicated tax issues, finding efficient resolutions that mitigate penalties and losses. For a reduced-rate consultation, contact us online today, or call the Tax Law Office of David W. Klasing at (800) 681-1295.
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