Disguising Personal Luxuries as Business Expenses Can Equal Tax Fraud

Some business owners may incorrectly view their company as an extension of their own personal finances and purchasing power. Others may attempt to minimize their own personal income to reduce or eliminate their personal income tax assessment. In still other circumstances, a business owner may attempt to shift a few ill-considered personal purchases over to the business books. Whatever the reasons one has for concealing the true nature of a debt or expense, such action is less than prudent in light of the IRS and DOJ’s investigatory and enforcement abilities. Mischaracterizing debts or expenses can open a business up to potentially unlimited years of tax enforcement actions including audits, criminal investigation, and potential civil or criminal tax charges.

This was the case for the CEO of Waimana Enterprises, Inc. In 2006, the IRS began auditing CEO Albert S.N. Hee, 61, of Kailua, Hawaii’s company due to questionable business expenses. For nine years this tax matter has hung over Mr. Hee and the company which culminated in Mr. Hee’s July 10th conviction on one count of interfering with the IRS’ administration of the U.S. Tax Code and six counts of filing false tax returns.

How did the Tax Fraud Scheme Arise?

Mr. Hee is a prominent Honolulu businessman whose company is engaged in building-out a telecommunications networks on the Hawaiian islands through its subsidiaries. In fact, one of the wholly-owned subsidiaries, Sandwich Islands Communications Inc., has the dubious distinction of operating the United States’ most expensive rural phone network where the federal government paid nearly $14,000 per a customer. This is about 100 times the average price for providing rural phone service in the domestic U.S.

As stated by U.S. Assistant Attorney Lawrence Tong, it is from these business ventures that Mr. Hee was able to, “[use] his company as if it was his own checkbook.” At trial the U.S. government was able to convince a jury that Mr. Hee had mischaracterized personal expenses as business expenses in situations including:

  • Hee told company accountants that the $96,000 expended on twice-weekly massages was actually for health consultation services.
  • Hee paid his wife and children a full-time salary despite the wife and children having little or no role with the company. The benefits and salaries totaled more than $1.67 million.
  • Hee purchased a $1.3 million house in Santa Clara, California that was close to a nearby college campus. Despite telling company accountants that the house would be used for company retreats, Mr. Hee’s children testified that they lived in the house during college, rented out rooms to other students, and that they kept the rent they collected.
  • Hee also used business proceeds to fund and deduct the college tuition and expenses for his children.
  • Hee ordered his company to cover personal credit card expenses.
  • The company was directed to cover expenses relating back to family vacations to France, Switzerland, Disney World, and other destinations. One family vacation was characterized as a “stockholder’s meeting.”

What are the Consequences of these Tax Convictions?

While Mr. Hee has yet to be sentenced, the charges he was convicted under can carry hefty penalties. Under 26 U.S.C § 7212 which sets forth the penalties for attempts to interfere with the administration of the Internal Revenue Code (IRC). If the attempts to obstruct or impede the administration of the code involve attempt of intimidation of an officer of the U.S. government or corruptly through actual or threatened use of force, up to three years of imprisonment and monetary fines can be imposed. If the offense is committed or attempted through only the use of force, a prison sentence of up to one year and monetary penalties can apply.

26 U.S.C. § 7206(1) addresses the penalties that can be imposed for making fraudulent and false statements regarding a tax return or other statements. Conviction under this statute requires the willful submission or disclosure of any return, statement or other document that is known to be false and submitted under penalty of perjury. Penalties include a $100,000 fine — $500,000 for corporations, and imprisonment for up to three years. Mr. Hee was convicted on six separate counts of filing false returns for the years 2007 through 2012.

Facing Serious Tax Problems?

If you have serious tax concerns about the characterization of past expenses or potential accounting errors that may create significant tax liabilities, the Tax Law Offices of David W. Klasing may be able to help. The firm’s dedicated, multi-disciplinary team of tax professionals includes tax attorneys and CPAs most of the key employees additionally have graduate level education in Taxation and over a decade of experience each. We work to provide the taxpayer options to mitigate their past non-compliant acts. To schedule a private, reduced-rate tax consultation, call us at 800-681-1295 or contact us online today.