Mohammad Hassan Mostafavi, 31, former owner, operator, and president of high-end San Jose, California car dealership Euro Auto Imports, Inc. (“Euro”), was sentenced in January to 36 months in federal prison following his conviction of three counts of tax evasion on October 24, 2017. The conviction arose from a tax fraud scheme, undertaken from 2009 through 2012, in which Mostafavi willfully failed to report, and pay taxes on, approximately $5 million in sales at Euro. Superior Court Judge Drew Takaichi, who handed down the three-year sentence on January 22, 2018, has scheduled a restitution hearing for March 9, 2018, which will take place in the Superior Court of California, County of Santa Clara. With Tax Day 2018 fast approaching, is worth noting that Mostafavi’s tax crimes were detected through an audit – which was triggered by a string of delinquent tax return filings.
As of 2018, there is no federal sales tax. While various politicians and advocacy groups have proposed adopting such a system, notably the nonprofit organization Americans For Fair Taxation, a “Fair Tax Plan” seems increasingly unlikely, having been omitted from recent tax reforms passed by Congressional Republicans.
While the federal government may not impose a national general sales tax, most states impose one of their own – and, unfortunately for local business owners, California is arguably the most prominent example. Though a statewide sales tax has been adopted by all but five states (namely Alaska, Montana, Oregon, Delaware, and New Hampshire), California is unique in holding the unenviable distinction of imposing the highest sales tax in the nation, with a current base rate of 7.25%. (For a detailed breakdown of how these tax dollars are spent, see our explanation of California’s statewide sales and use tax rate.)
State law requires California business owners, like Mostafavi, to assess and collect sales tax, then remit it to the appropriate agency. In California, that agency is the California Department of Tax and Fee Administration (CDTFA), which began operating on July 1, 2017 after Governor Jerry Brown signed the Taxpayer Transparency and Fairness Act of 2017 into law. The Act reassigned various, long-held functions of the California State Board of Equalization (BOE) to the newly-created CDTFA (alongside another new agency, the Office of Tax Appeals), giving the CDTFA responsibility for administering the state’s “sales and use, fuel and tobacco taxes, as well as a variety of other taxes and fees that fund specific state programs.”
Mostafavi violated California’s tax laws by intentionally failing to report multiple sales at Euro, reporting sales of approximately $1.8 million when the actual figure was, according to Santa Clara County Deputy District Attorney Erica Engin, who prosecuted the case, closer to “about $6.8 million.” By deliberately concealing roughly $5 million in sales from 2009 through 2012, Mostafavi avoided paying approximately $391,000 in sales tax, leading to felony tax evasion charges.
Mostafavi’s scheme was detected in part because he repeatedly failed to file a timely tax return; in part because he was repeatedly late in paying sales tax. These are red flags for California tax authorities, causing Mostafavi to be targeted for a civil audit. Perhaps needless to say, discrepancies uncovered during the audit gave rise to a criminal investigation, culminating in Mostafavi’s conviction, sentencing, and upcoming restitution order – which, considering the substantial figures involved in this case, is bound to be costly. Unfortunately for Mostafavi, he’ll be unable to rely on profits from his business, which has since been closed.
State tax authorities aggressively enforce compliance with California sales tax regulations, which are some of the country’s strictest and most complicated. As our car dealership tax audit attorneys have repeatedly observed, in a troubled economic climate, even scrupulous business owners are at risk of being selected for a sales tax audit. This risk is especially great if you run a cash-intensive business, have reported considerable exempt sales, have failed to report sales and use tax, or – like Mostafavi – were chronically late in filing your sales and use taxes. Even circumstances that are entirely beyond your control, such as the recent auditing of one of your vendors, can increase your company’s likelihood of being targeted for examination by the CDTFA or Internal Revenue Service (IRS).
If you are a California business owner and have recently received an audit notice, or if you are concerned about the possibility of being selected for a sales tax audit, the best course of action is to immediately consult with an experienced California sales tax audit lawyer who possesses the legal skill, the tax knowledge, and the tireless dedication to aggressively protect your business from being harmed by government overreach. Unfortunately, it is common for tax authorities to misapply sales tax laws to the financial detriment of small business owners. However, with effective legal representation on your side, you can feel confident that your best interests, and those of your business, will be zealously protected. To arrange a reduced-rate legal consultation with our business tax attorneys or tax evasion defense attorneys concerning a sales tax audit, an IRS tax audit, failure to file tax returns, allegations of tax evasion, or other state or federal tax issues, contact the Tax Law Office of David W. Klasing online, or call us today at (800) 681-1295.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San Bernardino, Santa Barbara, Panorama City, and Oxnard! You can find information on all of our offices here.
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Here is a link to our practice overview video on warning signs than an audit has gone criminal.
Common issues when facing a sales tax audit; https://www.youtube.com/watch?v=yXVIXvUKxD0
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