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Tennessee Business Owner Indicted on Tax Evasion and Obstruction Charges

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Tennessee Business Owner Indicted on Tax Evasion and Obstruction Charges


According to a Department of Justice press release, the owner of a Nashville nail salon business was recently indicted on tax evasion and obstruction charges after being accused of misclassifying his workers for tax purposes, paying wages under the table, and dodging employment tax obligations. This case serves as yet another example of the seriousness of failing to properly comply with federal and state tax laws, particularly when they relate to employee and payroll tax. If you classify your labor as “independent contractors” or pay wages “under the table”, you should consider consulting with an experienced employment tax defense attorney to determine whether you are exposed to any civil or criminal risk and if so, to establish a plan to come into tax compliance and avoiding criminal tax prosecution. 

Defendant is Accused of Paying Employees Under the Table, Ducking Payroll Tax Obligations

Court records reveal that Chieu K. Tran, 54, of Tennessee, was the owner and operator of Signature Nails Spa. In charging Tran with tax evasion and obstruction of justice, federal prosecutors allege that he employed between 25 and 50 nail technicians but misclassified them as independent contractors and paid them in unreported cash, resulting in the severe underpayment of employment tax. During an investigation, the IRS determined that the employment arrangement between Tran and his nail technicians involved payment of half of their wages in cash and the other half in the form of a check. Between 2014 and 2018, the IRS estimates that Tran paid his nail technicians more than $10.5 million in this split method.

Several years earlier, the Tennessee Department of Labor and Workforce Development audited Tran’s business and determined that he had been misclassifying his labor as independent contractors when they should have been properly classified as employees. Reclassifying Tran’s labor to employee status would have required him to file quarterly reports identifying the amount of wages paid and would further require the payment of employment taxes. Further, Tran would be required to withhold taxes from the paychecks of his employees and remit such amounts to the IRS. Nonetheless, Tran is alleged to have disregarded the findings of the Tennessee Department of Labor. He allegedly continued to pay most of his employees “under the table”.

Prosecutors allege that Tran failed to file employment tax returns, failed to withhold federal income taxes from his employees’ paychecks, and failed to pay the employer-portion of the employment taxes associated with the wages paid to employees. Federal prosecutors allege that the tax loss caused by Tran exceeds $542,000. In addition to the tax loss allegedly caused by failing to comply with employment tax requirements, Tran is alleged to have directed employees to lie to the IRS during the course of the investigation which is a crime called obstruction.

If Tran is convicted, he faces up to five years in federal prison for the tax evasion count and up to two additional years for the obstruction count. Additionally, Tran could be sentenced to serve up to three years of supervised release, commencing upon the completion of any physical incarceration. Lastly, Tran faces an order to pay restitution to the IRS representing the tax loss that he caused the U.S. government.

Coming Into Payroll Tax Compliance After You’ve Fallen Behind

The story above illustrates the seriousness of being accused of violating federal employment tax laws. Because federal income taxes withheld from the paychecks of employees is the federal government’s single largest source of tax revenue, those who work to erode the payroll withholding process often feel tremendous pressure during the course of an audit, investigation, and prosecution. It is much easier to rectify previous non-compliance prior to the IRS commencing an audit or criminal tax investigation related to employment taxes.

If you own a business or are responsible for the withholding of payroll taxes for a company, you are legally responsible for ensuring that payroll taxes are withheld, properly accounted for, and remitted to the IRS on a regular basis. If you have doubts as to whether your company is in compliance, it is worth consulting with an experienced employment tax defense attorney. Together, you will determine if you or your business have any civil or criminal tax exposures. If so, you will jointly establish a strategy to come into compliance. Getting ahead of tax compliance issues is often the most effective way to manage the potential negative consequences that could come with a tax audit, investigation, or prosecution.

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