Former Mayor (and Current CPA) Learns of Tax Fraud, Joins the Conspiracy

This is for the don’t do this at home file for tax professionals. Kenneth Harycki is the former mayor of Stillwater, Minnesota. He’s also a licensed CPA in Minnesota (but probably not for much longer). Mr. Harycki will provide an interesting lesson the next time I teach ethics.

Mr. Harycki provided accounting, tax, payroll, and bookkeeping services to clients. Back in 2007, he provided services to Model Health Care. From the Department of Justice press release:

Within the first few payroll cycles for Model Health Care (Model), a company controlled by the two separately charged co-conspirators, the defendant concluded that while payroll taxes were being withheld from the wages of employees, those taxes were not being paid over to the government. The defendant learned that these co-conspirators had directed that the withheld taxes not be paid to the government and, instead, the taxes would be used for other purposes, including compensating the co-conspirators and their family members and funding other businesses operated by the co-conspirators.

Now, let’s assume you’re a tax professional and you learn that a company is withholding payroll taxes and not paying them to the IRS. Would you:
(a) Tell them that the taxes aren’t being paid, that’s violating the law, and you need to fix this (which could include setting up payment plans with the IRS and Minnesota, or just paying the withheld funds);
(b) Tell them that if they don’t start remitting the withheld funds that he would need to quit the engagement; or
(c) Join the conspiracy.

Choice (c) is not one that most of us would consider. It is, though, the one that Mr. Harycki not only considered but did:

According to the defendant’s guilty plea, on February 18, 2010, HARYCKI created the entity MKH Holdings, Inc., to assume control over bank accounts used to fund businesses operated by the co-conspirators. The entity was used to cause funds falsely reported on income tax returns to be paid to the co-conspirators and others. During the course of the conspiracy, HARYCKI also incorporated other businesses, obtained employer identification numbers, paid for personal expenses, filed false tax returns, and opened and used numerous bank accounts for the benefit of the separately charged co-conspirators in order to avoid payment of taxes.

Given that the tax loss is between $1 million and $2.5 million, Mr. Harycki will be heading to ClubFed.

There’s not much to add to the press release. If I discover a defalcation while preparing a return, it’s my responsibility to tell the client. And if my client tells me he’s going to continue the actions, I’m required to quit the engagement. I’ve had to do this once in my career; if I discovered such a fraud I’d make the easy decision to get out the engagement. Apparently Mr. Harycki’s ethics were a bit different than most CPAs and EAs. My. Harycki has received a nomination for the 2015 Tax Offender of the Year, though.

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One Response to “Former Mayor (and Current CPA) Learns of Tax Fraud, Joins the Conspiracy”

  1. […] Fox, Former Mayor (and Current CPA) Learns of Tax Fraud, Joins the Conspiracy Now, let’s assume you’re a tax professional and you learn that a company is withholding payroll […]

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