While there are many ways through which individuals and entrepreneurs may organize a company, a family business is a tried and true approach. In a closely-held family business, it is far more likely that the interests of all parties will align. Furthermore, due to the family relationship, trust among partners or managers is not typically an issue. Therefore, family businesses can often benefit from a number of synergies among investors, managers, and interested parties.
However, a family business can also give rise to a greater potential for fraud, waste, and tax evasion. Family members may believe that other family members will facilitate improper transactions or refrain from blowing the whistle on improper transactions such as using company funds to cover personal expenses or to buy luxury goods. However, if the company comes under audit or investigation by the IRS or state tax agency, auditors from the IRS, California Franchise Tax Board (FTB), or another tax agency auditors will simply follow where the paper trail leads. Family relationships will not be enough to protect you from facing civil tax, penalties and interest or criminal tax charges.
During the 1990s, Harold Hart and Larry Dean Ball founded a retail western wear store known as The Old Fort Western Store. The store sells western apparel, footwear, saddles and other items. The company has been continuously operated by Hart, Ball, and various family members since its founding. On the surface, the business appeared to achieve success while playing by the rules. Unfortunately, an array of improper financial transactions and other practices likely has inhibited the business’s growth.
According to prosecutors, Harold Hart, 80, Larry Ball, 68, Mary Ball, 67, Katrina Rose Freeman, 42, and Gary Daniel Musick 45, all engaged in improper transactions at the store. Freeman and Musick are the grandchildren of Harold Hart.
Per prosecutors, starting in 2010, the five individuals agreed that they would begin skimming cash from the store’s sales receipts. Some of the particular details of the scheme included:
While the scheme was active, from roughly 2010 to 2016, prosecutors claimed that the five individuals skimmed more than $1.2 million in cash from the business. The individuals did not report or pay taxes on the skimmed funds.
The defendants recently pleaded guilty to a number of charges. Each defendant pleaded guilty to one count of conspiracy to impair, impede or obstruct the lawful function of the Internal Revenue Service (IRS) and one count of wire fraud. While the defendants have yet to face sentencing, they could face a maximum penalty of up to five years in prison and a fine of up to $250,000. The defendants have already agreed to pay more than $440,000 in federal taxes, interest and penalties; greater than $100,000 in state taxes, interest, and penalties; and over $40,000 in fines. The taxpayers also agreed to forfeit roughly $30,000.
The important takeaway here is that despite a group of five co-conspirators who were related and unlikely to turn on one another, the IRS still detected their improper acts. While some might believe that the combined testimony of family members may be sufficient to stall or eliminate an investigation or audit, the facts of this case suggest differently. In fact, the family members did not even attempt to go to trial and all engaged in the plea bargain process entering guilty pleas.
If apparent financial improprieties have you worried about tax fraud, tax evasion, or other tax charges the criminal tax defense lawyers and CPAs of the Tax Law Offices of David W. Klasing may be able to help. Our legal team can assess your organization’s transactions and practices. If we do uncover potential problems, we can work to develop a strategy to bring your company back into compliance with the U.S. Tax Code while simultaneously mitigating potential civil and criminal penalties. To schedule a confidential, reduced rate consultation at our Los Angeles or Irvine Law Offices, please call 800-681-1295 today or contact us online.
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