A Montana couple is facing penalties that may include prison time, supervised release, and substantial fines in connection with felony tax fraud involving their construction company. James and Timilynn Kisling, the co-owners of Kisling Quality Builders (KQB), pleaded guilty on December 31, 2019 to federal income tax evasion, which violates 26 U.S. Code § 7201 (attempt to evade or defeat tax). By “knowingly and willfully omitting profits from their 2014 and 2015 tax returns,” the Kislings, according to a Department of Justice press release, willfully evaded the payment of more than $320,000 to the Internal Revenue Service. The exact amount for which the Kislings are liable remains a matter of some dispute, with the IRS claiming the Kislings owe approximately $327,660 (plus penalties and interest), while the Kislings contend that the number is closer to $320,100. In either case, the tax owed is substantial – as are the criminal penalties the Kislings may face at sentencing.
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According to court records, the Kislings’ scheme involved former executive Larry Wayne Price, Jr., who is presently awaiting sentencing on unrelated charges involving “wire fraud, money laundering and false statements for defrauding coal companies of about $20 million and,” in an unusual detail, “lying to investigators about a fake abduction.”
The Kislings constructed an ornate Billings mansion for Price, who hired KQB in 2014. (The home, which originally sold for around $16.5 million, is complete with “three pools, a bowling alley and an indoor shooting range” and “has never been lived in,” according to US News.) The deal between Price and the Kislings stipulated that KQB’s profits would be 9% of the cost of constructing the home: a substantial amount, considering the mansion’s size and detail.
The same year, the Kislings began construction on a personal home. However, “Instead of paying for this house with their income, the Kislings arranged with Price to make it appear as if the cost… was part of the construction costs of Price’s mansion,” as the DOJ explained. The Kislings took intentional steps to achieve this illusion, including calling their home the “Price Guest House” in records. They also made an arrangement by which Price, who had previously agreed to pay an additional 9% of the construction costs on his mansion, “would simply not pay the Kislings approximately $526,132, which was the cost of constructing their personal home.” With Price deducting construction costs for the “Price Guest House” from his payment to KQB, the profits were not reported on the Kislings’ 2014 income tax return.
The Kislings repeated a related scheme the following year, willfully failing to report approximately $275,000 in profits. In that instance, Price loaned the funds to the Kislings, who misrepresented repayments “as expenses related to the ‘Price Guest House’ and deducted from the 9% Price was supposed to pay the Kislings.”
Altogether, the Kislings omitted from their 2014 and 2015 tax returns profits totaling just over $800,000, causing a tax loss of approximately $327,000. Though the Kislings claim this number is closer to $320,000, they did not deny engaging in tax fraud, to which they pleaded guilty last month. Their sentencing hearing, though yet to be scheduled, may involve harsh penalties. As set forth under the federal tax evasion statute, 26 U.S. Code § 7201 (or IRC § 7201), criminal penalties for tax evasion include maximum fines of $100,000 and/or up to five years in prison, “together with the costs of prosecution.” Though not stated in 26 U.S. Code § 7201, supervised release and civil fraud penalties are also typical consequences of a tax fraud conviction.
This case should be a warning to construction business owners, who are frequently selected for state and federal tax audits. If your construction company was chosen for a California or IRS audit, including a worker classification audit or employment tax audit, talk to the construction industry tax audit lawyers at the Tax Law Office of David W. Klasing about how we can help. Our award-winning team Los Angeles construction audit lawyers, San Francisco construction audit attorneys, and corporate tax accountants for construction companies, enabling us to provide effective guidance on civil, criminal, and business tax issues. To schedule a reduced-rate consultation, call the Tax Law Office of David W. Klasing at (800) 681-1295, or contact us online today.
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