Restaurant and business owners located in dynamic and bustling metropolitan area such as Los Angeles or Orange County may come to believe that the California Economic Development Division, Franchise Tax Board, IRS, or other tax enforcement agencies cannot possibly effectively police all the economic activity in the area. Other business owners may believe that the cash receipts they receive are untraceable by tax authorities and creates an opportunity to underreport income or payroll expenses.
Unfortunately, these assumptions are recklessly Illegal and can create a scenario where potential harsh civil and criminal tax penalties – including a prison sentence – are justified. Auditors for federal and state tax agencies simply follow the paper trail. If a company’s books or records are missing, disorganized, believed to be fraudulent, or otherwise not reliable, the agent may even set aside the books and resort to a sample observation audit or markup audit to determine the company’s sales and taxable revenue.
Chang Tai Lin was the owner of the popular AA Buffet located in Salinas, California. While the business is popular with local businesses and workers, it also apparently attracted numerous tour buses and tourists. Thus, the business seemed to be well-frequented and profitable for its owner. However, it appears that the legitimate business profits were not enough and the business owner engaged in certain fraudulent practices to illegally reduce business compliance costs and taxes.
The businesses’ tax troubles bubbled to the surface in May of 2015 when a District Attorney’s Office [MCDA], Workers’ Compensation Fraud Unit began an investigation. The investigation initially focused on obtaining an array of documents from local law enforcement, state tax and government agencies, and the buffet’s workers’ compensation insurance company. In March 2016, a search warrant was served on the business and the business owner’s home.
The investigation revealed a fraud scheme that involved underreporting the restaurant’s number of employees and payroll obligations. The scheme involved misrepresenting the number of workers who were employees. To conceal the existence of a large percentage of his employees, the defendant paid certain worker wages in cash. The owner did not report these payments on 1099’s while considering these employee’s independent contractors, or on W2’s as employees. Additionally, these cash basis workers were not reported for works comp insurance purposes, thereby allowing him to obtain workers’ compensation coverage at a significantly reduced premium. The restaurant owner also failed to report and properly account for payroll taxes for the off the books employees. This pattern is also quite common where a restaurant employs illegal aliens which raises a whole host of other types of civil and criminal exposure.
Business owners who attempt to pad profits through payroll tax fraud can face an array of serious consequences. Since payroll tax fraud is often accompanied by additional types of fraud including workers’ compensation fraud, the business owners, and responsible parties may face a multi-front battle. Since payroll tax issues also have a federal component, taxpayers accused of this type of act should also be prepared to meet the challenge of a federal payroll tax audit or allegations of wrongdoing.
As for the workers’ compensation insurance fraud, this is a California state crime which is punishable by a state prison sentence of up to five years. A monetary penalty of up to twice the amount gained due to fraud can also be imposed. As for the state payroll tax evasion charges, upon conviction, an individual who willfully violates the law can be punished with a prison sentence of up to three years and up to a $20,000 fine as well as federal criminal prosecution, penalties and restitution.
If the matter also impacted federal payroll tax obligations, then additional civil penalties are possible.
If your business is facing questions regarding payroll taxes, sales tax, income tax, or other tax obligations the attorneys and tax professionals of the Tax Law Offices of David W. Klasing may be able to fight for you strategically and aggressively. Mr. Klasing is a dually certified attorney and CPA who can put his experience as a former public auditor to work for you. To schedule a confidential consultation online click here or please call 800 681-1295 today.
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