How Does Criminal Employment Tax Fraud Happen?

Employers are bound by law to withhold certain portions of their employees’ salaries from their paychecks for purposes of paying Social Security, Medicare, and municipal, state, and federal taxes. In other instances where employers do not withhold taxes, the responsibility for remitting taxes shifts to the employees themselves. Whoever ultimately bears the liability, the bottom line is that employment tax evasion is a form of fraud, and an IRS investigation can lead to very harsh civil or criminal consequences. This blog entry explores some of the more recent prosecutions of employers for payroll tax fraud crimes that made the IRS’ “convicted” list.

Payroll Tax Fraud: Failure to Pay the IRS

  • January 20, 2012: Alexandria, Va. resident Russell Fournier was sentenced to 25 months in prison plus three years of supervised release for failure to pay more than $700,000 in employment taxes collected from 2000 to 2008. For nearly a decade, Fournier failed to file his company’s tax returns and pay to the employment tax, instead electing to spend company funds on trips abroad and luxury cars.
  • January 24, 2012: Springfield, Mo. resident Robert Landis was sentenced to 37 months in prison and ordered to pay over $6 million. Landis took deductions from his employees’ pay between 2005 and 2009, but neither paid the IRS nor accounted for the tax.
  • February 22, 2012: Miami resident Osvaldo Martinez was sentenced to two years in prison. Despite withholding employee payroll taxes from his employees’ salaries, Martinez failed to remit $1,781,294 to the IRS.

The IRS reports that throughout the remainder of 2012, nearly 150 employment tax evasion investigations were launched — resulting in an 81% incarceration rate.

Keeping Employment Taxes

  • February 21, 2012: Rochester, N.Y. resident  Jeffrey Sykes was sentenced to eight years in prison plus three years of supervised release, and ordered to pay nearly $4 million. The owner of a payroll company, Sykes failed to use approximately 1,100 clients’ funds to pay the appropriate employment taxes. (Sykes also failed to submit the required 941 Form for Employer’s Quarterly Federal Tax Return — and then lied to his clients about it.)

Obstructing the IRS

  • February 3, 2012: Pittsburgh residents Richard J. Connell and Richard Swartz were sentenced to 15 months in prison in addition to three years of supervised release, and have been ordered to pay a $30,000 fine. Connell and Swartz operated an auto-parts store, but obstructed the IRS from collecting income and employment taxes in addition to filing false tax returns.

Bribery

  • January 26, 2012: Camden, N.J. resident Channavel “Danny” Kong was sentenced to two years in prison plus three years of supervised release. Kong must pay $15,000 to the State of New Jersey and must also pay his back taxes to the IRS. Kong attempted bribery by making illegal cash payments in the amount of $55,000 to an investigator of the State of New Jersey. Ironically, Kong’s goal was to convince the investigator not to conduct any IRS audits or inspections… including looking into his payroll taxes.

Misappropriation of Funds

  • November 15, 2011: Manhattan resident Michael Mahoney operated by cashing checks which represented his company’s receipts at New York City check-cashing establishments, rather than depositing them in the corporate bank accounts. He then used the funds to pay his employee’s wages, instead of the taxes. Following his conviction, he was sentenced to two years of home confinement as well as two years of supervised release. Mahoney has also been ordered to pay the IRS just over $300,000.

Preparing False Tax Returns

  • November 3, 2011: Miami resident Braynert Marquez was sentenced to 30 months in prison plus one year of supervised release, and is now required to pay back just over $280,000. His crime? Aiding and assisting in the preparation of a false employment tax return, under-reporting tips, wages, and other compensation paid to his employees. From 2004 through 2007, Marquez paid his employees “off-the-books,” which he subsequently failed to report to the IRS on Form 941; and he failed to withhold and pay over employment taxes on the wages.

If you have intentionally or unintentionally committed one of the above offenses, or something like it, you need to retain competent legal counsel to best defend your future. We can help. Our Office specializes in this niche area of the intersection of criminal law and tax fraud.