Taxable Talk

There’s nothing wrong with paying employees in cash. Indeed, in some industries it’s the norm. However, you still must withhold payroll taxes and properly report the earnings. The owners of a Massachusetts temporary agency found that out this week.

Michael Powers and John Mahan owned Commonwealth Temporary Services, Inc. in Stoughton, Massachusetts. Powers and Mahan believed that if it wasn’t written down or reported, it didn’t happen. Unfortunately for them, the US Department of Justice proved that they paid employees more than $25 million in cash and didn’t report it. They did save $7 million in taxes (and saved more on workers compensation).

But they’re not going to get to enjoy that money; they were convicted of one count of conspiracy to defraud the Internal Revenue Service and their workers compensation insurers, one count of mail fraud and two counts of false tax returns. Instead of making a little less money but complying with the law, they’ll likely pay a lot of fines and enjoy ClubFed.

As I’ve said before, the government takes trust fund taxes very seriously. This isn’t the area to mess around in.

I’ve said this before, and I’m certain I’ll say it again: If you want to get in trouble with the IRS, the fastest way to do so is to not remit your federal employment taxes. These are called trust fund taxes, as employers remit money held in trust for the federal government. It’s the government’s money, and they want it.

That lesson has now been learned by Frank Bivings and his wife, Isabelle Blanco. The Washington D.C. residents own the Bivings Group, an Internet communications firm. With 30 employees (according to their web site), they certainly have employment taxes. However, the husband and wife felt that paying themselves larger salaries was more important than remitting those taxes. According to the Department of Justice, $1.8 million of the $2.4 million that wasn’t remitted were federal trust fund taxes. It’s probable the rest were local (District of Columbia) taxes, and that’s nearly as bad: The District is federal land.

Mr. Bivings pleaded guilty to one count of failing to pay employment taxes; Ms. Blanco pleaded guilty to one count of failure to pay a tax. Mr. Bivings’ charge is by far the more serious; he’s looking at a stay in ClubFed of 30 – 37 months. Ms. Blanco is likely to receive probation. The husband and wife have agreed to make restitution of the unpaid employment taxes.

I’ll repeat this again: Make sure that when you collect federal trust fund taxes that you remit them.

Let’s head to North Tonawanda, New York (near Buffalo). Vicnent Mangione allegedly had a nice tax and payroll business. The Department of Justice alleges that Mr. Mangione had a different method of handling payroll taxes than what you and I would expect. Assistant US Attorney Michael DiCiacomo told the Buffalo News,“Unbeknownst to the businesses, Mangione would secure from the businesses the proper amount of quarterly tax due to the IRS and then submit a false tax return on behalf of the business that underreported the amount of tax due,” DiGiacomo said. “According to the indictment, Mangione would then keep the difference for his personal use.” Mr. Mangione, through his attorney, denies any wrongdoing.

No matter if you use a payroll service or not, check to make sure that the government is receiving your payroll tax deposits. You are liable for your trust fund taxes, and the government always comes calling if they don’t receive the funds.

If there’s been a recurrent theme in this blog, one has been if you don’t pay your Trust Fund taxes you will get in trouble. Such trouble hit Michelle Bielaski of Bellevue, Washington.

Ms. Bielaski’s company, Falcon Construction, Inc., paid $3.9 million in salaries between 1997 and 2007, and should have paid $2.4 million to the government for Trust Fund Taxes (Medicare, Social Security, and Federal Income Tax) but didn’t. If you live what the US Attorney calls an expensive lifestyle and get caught—and almost everyone who evades payment of Trust Fund taxes gets caught—you almost certainly will get to visit ClubFed.

Such is the case for Ms. Bielaski. She pleaded guilty last June, and found out last week that she’ll spend 15 months at ClubFed. She must also make restitution of the $2.4 million. As usual, it’s a whole lot easier to pay now then to pay later.

California currently has a $24 billion budget deficit. Would you be surprised to learn that there’s another $17.8 billion budget deficit on top of the current budget fiasco?

It’s true.

California has had a major problem with the funding of unemployment insurance for years. Unemployment benefits are paid for through taxes on employers: the FUTA, SUI, and ETT taxes. FUTA is the Federal Unemployment Tax; SUI is the State Unemployment Insurance Tax; and ETT is the California Employment and Training Tax. FUTA is generally $56 a year per employee while SUI and ETT totals $160 to $350 a year per employee. At the end of 2008 the fund had a slight surplus, but had been in deficit funding in prior years.

It was in poor shape because Democrats in California’s legislature increased benefits (which they could do with a majority vote) but didn’t increase taxes (which takes a 2/3 vote). Increased spending led to the usual result: an increase in the deficit of the unemployment insurance fund.

The problem has ballooned in 2009 with the increase in unemployment. The San Francisco Chronicle is reporting that the fund is solvent only because of borrowing $17.8 billion from the federal government. Unfortunately, the federal government wants to be repaid and if the fund doesn’t become solvent that’s impossible. Governor Schwarzenegger proposed an increase in the SUI tax along with a decrease in benefits. The measure has not been heard; frankly, there’s no chance of any tax increase passing in the legislature this year.

So California continues to drift towards fiscal Armageddon. Given the likelihood of even more unemployment in coming months this is a problem that will have to be resolved sooner than later. If California does nothing, the federal government can impose higher FUTA taxes on California employers. If that happens employers will certainly choose to increase employment in other states if they have that option.

With a name like Sweeties you can probably guess what the business was in. If the government is correct, your first instinct would be right.

The Department of Justice is accusing Douglas Ketcher and Christina Wypych of Oakland Park, Florida of running a prostitution ring. That in itself is illegal. But not only did they allegedly violate those laws, the 58-count indictment also alleges that the owners did not pay their staff their full wages and, more importantly, didn’t remit their trust fund taxes to the IRS.

As I’ve said repeatedly, a sure-fire way of getting in trouble with the government is to not remit trust fund taxes or somehow get the accounting of those taxes wrong. The IRS investigates nearly 100% of these cases, and if you’re underlying business is shady the last thing you want is to have government investigators knocking on your door.

The indictment of Mr. Ketcher and Ms. Wypych alleges that their business, Sweeties, charged $300 an hour for customers to be “entertained” by their employees. Had they remitted their trust fund taxes they’d likely not be facing money laundering, tax fraud, and prostitution charges.

The Pruzan Law Firm began in 1938 in Brooklyn, New York. That’s about the only thing you’ll find on their web page.

Even that may be a thing of the past soon. The Department of Justice has filed a lawsuit to compel the Pruzan Law Firm to pay their back taxes…all 45 quarters they’ve skipped. That takes them back to 1997. As I’ve said many times in the past, a sure way to get yourself in trouble is to not pay your Trust Fund Taxes.

Joe Kristan has more.

Below I present a trifecta of guaranteed methods to get you in very deep trouble with the IRS and your state tax agency. If you follow one of these methods you will likely find yourself on your way to ClubFed. Follow all of them, and a lengthy stay is almost guaranteed.

Let’s head first to Niles, Ohio. Niles is near Youngstown, and happens to be the home of the William McKinley Memorial and Library. I visited it two years ago, and it’s well worth the trip. But I digress….

John Matuszwski used to operate Matuszwski Roofing and Siding. He allegedly liked to pay his employees partially in cash. That’s not illegal. He also allegedly only included the portion of the money he paid his employees by check on their reporting forms. If true, that’s a crime. He also allegedly didn’t pay the trust fund (FICA) taxes to the government. As I’ve said before, not remitting those taxes is a sure-fire way to get in trouble. Mr. Matuszwski faces one charge of attempting to evade employment taxes totaling over $165,000.

Our second method of getting in trouble is one that has been tried many times. Just skim some of the revenue off the top from a business, and not report it on your tax returns. Mohammed Arif, Mohammed Memeon, Haji Memon, Mohammed Naemm, andd Mohammed Jaweed pleaded guilty earlier this week to tax evasion. The five, who are brothers, skimmed “significant” amount of revenue from their Dollar Dreams stores. They had their store managers keep good records of the skimming. That probably wasn’t a brilliant idea, as it gave the government good records of the skim, too. The five have agreed to make $1.2 million of restitution (in total) and will be sentenced in September.

Our third method comes straight from the Tax Protester FAQ. If you try to argue that there is no such thing as an income tax, or that it doesn’t apply to you, or that it has never been ratified, or that it’s unconstitutional, I guarantee bad things will happen to you.

And if you’re an attorney, you definitely should know better. Bernard Bagdis of Norristown, Pennsylvania, believed that neither he nor his clients had to file tax returns because of various business losses. (Hint: He’s wrong.) We’ve written about Mr. Bagdis before.

Mr. Bagdis boasted he was going to write Federal Tax Fraud: The User’s Guide. Instead of writing a book, he may have the book thrown at him. He was convicted last week of helping clients evade over $5 million in taxes on $24 million of income.

As I’ve said before, there is an income tax. There are also laws on withholding of income from employees’ checks. If you follow one of the methods outlined above your new home could be ClubFed.

Let’s head to Corpus Christi, Texas. Stephen and Bryan Lyons operated B&T Rents. The store was profitable. Of course it helps when you don’t send your trust fund taxes to the IRS. As I’ve said before, if you do that you’re guaranteed to face an IRS investigation. They did. The owners had hoped that front companies would hide where the money was from the IRS. That wasn’t successful, and the two owners pleaded guilty to tax fraud. Stephen Lyons received a year and a day at ClubFed; Bryan Lyons received 18 months. Both had to pay $10,000 fines. The two have already made full restitution to the IRS.

If your business is having trouble paying trust fund taxes, get legal and/or tax advice now. This is one area where malfeasance will almost always be discovered and where tax fraud will almost always be prosecuted.

I’ve heard many times that cash is king. Well, that’s not always the case as Leroy Felt, Jr. discovered.

Mr. Felt was the owner of Woody’s Construction in Margate, Florida. He decided to pay his employees in cash. That’s absolutely legal…as long as you make all the necessary payroll deductions. Mr. Felt had a better idea.

He wrote corporate checks to various companies and individuals. They, in turn, gave Mr. Felt the cash (less a small fee kept for the service). Mr. Felt then used the cash to pay his employees. Mr. Felt thought he didn’t need to worry about those pesky payroll taxes.

The government doesn’t like it when you violate trust fund taxes. People who do so end up in prison when they’re caught and they end up paying the tax plus penalties and interest. Mr. Felt got caught, pleaded guilty, and was sentenced to ClubFed for four years.

Paying people under the table is a bad idea. If you get caught it’s almost a certainty that ClubFed is in your future.