Successful business owners sometimes begin to believe that their business is their kingdom and anything they do within their business is well within their rights. In other cases, they may believe that they know their books better than anyone and can easily conceal or explain away potential improprieties. Unfortunately, for business owners who hold these beliefs, the IRS, and other tax agencies will not be deterred from following the evidence and trail of tax fraud.
As to the first assumption, business owners certainly do have some degree of discretion in how they run their business, but that discretion ends where legal duties begin. For instance, sales tax, employment tax, and other trust fund tax obligations are strictly enforced and investigated. As to the second assumption, the auditors from the IRS, California board of Equalization (California BOE) and other tax agencies are highly trained and experienced in audit methods and techniques. If there are sales tax irregularities or other problems in your books, you can assume that they will find the problem.
Restaurant Owners Understated Sales Receipts to Short Federal Income Tax Obligations
Kenneth and Rodney Archer are siblings who ran the popular restaurant known as Lotawata Creek Southern Grill. By all accounts, the restaurantis highly successful and profitable for the brothers. Unfortunately, it seems that the brothers weren’t satisfied with their level of success and recently admitted to engaging in a tax fraud scheme that took place from 2010 to 2015.
The brothers admitted to manipulating the books in the restaurant to reduce reported cash sales below actual levels. The brothers would then divert a corresponding amount of cash prior to making store cash deposits and reports of gross receipts. Recently the brothers both pleaded guilty to federal tax obstruction.
For their acts, the brothers each face a maximum potential federal prison sentence of five years. They can also face a $250,000 fine, restitution for the unpaid tax, and up to three years of supervised release. The restaurant can a $500,000 fine and other serious penalties.
The IRS and other Tax Agencies Carefully Scrutinize Cash-Intensive Businesses
One lesson we can learn from the tax conviction described above is that the IRS, Board of Equalization, and California Franchise Tax Board place special scrutiny on restaurants and other businesses that are considered “cash intensive.” Cash intensive businesses are those establishments that receive a significant portion of its income and receipts in cash. Aside from restaurants, businesses of this type can include bars, convenience stores, grocery stores, gas stations, and many other businesses. The IRS recognizes the additional potential for abuse that cash presents and have therefore developed an audit guide focusing exclusively on businesses of this type.
If you think you’ve developed a novel or unique scheme to funnel money from your company or to otherwise commit tax fraud, think again. Not only has the IRS auditor almost assuredly seen and identified a scheme like yours previously, your scheme is probably in this audit technique guide or another manual.
California Criminalizes the Use of Zapper Devices to Commit Sales and Income Tax Fraud at Cash Intensive Businesses
One method restaurant and other cash intensive business owners may utilize to attempt sales tax or income tax fraud are devices known as zappers. Zappers are small USB devices that plug into a cash register or point of sale terminal. Once installed, these devices allow the store owner to modify receipts and other records. Aside from potential penalties for the underlying tax fraud, the California BOE campaigned for a law that makes the use or sale of zapper devices a crime.
Under the California zapper law, a business owner convicted of using the device could face harsh penalties. The penalties could include up to three years in prison and up to a $10,000 fine for each offense. Considering the fact that zapper charges are likely to arise along with other tax charges, the user of a zapper can face substantial fines, penalties, and jail time.
Many business owners think that they’ll never be caught using a device of this nature. However, the California BOE is known to send undercover agents into businesses throughout the state. Los Angeles business owners who believe that they can simply rely on scarce agency resources to avoid enforcement should think again because significant resources are deployed for enforcement activities in this area. Even if you avoid detection for several years, the potential penalties and harsh prison sentences involved seriously outweigh the potential short-term gains.
