According to a Department of Justice press release, a Long Island, New York, business owner pleaded guilty recently to tax evasion after failing to follow many laws as required by the Internal Revenue Code. This posting is a reminder to small business owners that some of the common tricks, stunts and schemes used to minimize the reporting of income can often constitute illegal income tax evasion. If you are a business owner facing scrutiny (Federal or California audit or criminal tax investigation) over your personal or business taxes, it is in your best interest to contact an experienced civil and criminal tax defense attorney as soon as possible.
Court documents revealed that Warren J. Krotz, 62, of Huntington, New York, owned and operated W. Krotz Enterprises Inc. (hereafter referred to as “WKEI”). WKEI provided professional painting services throughout the Long Island area. As a part of the investigation conducted by the IRS and the Department of Justice, Krotz admitted to activity that constituted tax evasion for both his individual and employment tax liabilities.
Between 2010 and 2016, WKEI was issued approximately $6 million in checks by clients for the payment of painting services. Krotz did not deposit the checks into a business bank account, but instead took them to various check-cashing facilities. Despite the fact that the checks were gross receipts of WKEI, Krotz did not report the amounts on WKEI’s corporate income tax returns. Additionally, Krotz admitted to paying nearly $2 million in wages to employees in cash, instead of through W2 payroll which aided and abetted the income tax evasion of his employees as to the unreported cash wages. The result was Krotz not withholding and paying over to the IRS approximately $300,000 in employment taxes.
Finally, Krotz admitted to earning approximately $3 million of income that he did not report on his personal tax returns. In total, prosecutors alleged and Krotz agreed that he caused a tax loss to the IRS of approximately one million dollars. Sentencing is scheduled for September and Krotz faces five years in federal prison for the tax evasion charge. Additionally, he will likely be sentenced to serve a term of supervised release after his physical incarceration. He will also likely be ordered to pay restitution to the IRS relating to the tax loss.
This story likely hits home for many small to medium sized business owners that have ever cut a few corners when it comes to the keeping of books for tax purposes and the payment of employees. The IRS and state taxing authorities view keeping a second set of books solely for tax purposes that is separate and apart from the actual “kosher” financials of the company as a firm indicator, or “badge” of tax fraud. Likewise, the payment of employees in cash without withholding for employment taxes, including Social Security and other government programs and without issuing 1099’s or W2’s is patently illegal.
There are various methods that a business owner can legally work at lowering their annual income tax liability, but the failure to report income, cashing checks with the intent of hiding the income from tax authorities, and paying workers under the table are not among them. If you own a business and are interested in structuring your affairs in a tax efficient manner, contacting an experienced business tax attorney is a step in the right direction. Likewise, if you own a business and are the target of an IRS or state inquiry or have engaged in behavior in the past that could be noncompliant, it is in your best interest to contact a tax defense attorney to help you resolve the matter, proactively.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience in representing taxpayers from every walk of life with a diversity of civil and criminal tax issues. Whether you are facing an employment tax dispute or are under examination for an unrelated tax matter, our team of skilled advocates are standing by to help you craft a strategy that will avoid criminal prosecution if possible and minimize civil penalties and interest. Do not let the IRS or California tax authorities keep you up at night. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
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