Taxable Talk

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.

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 said this before but it bears repeating—especially on Labor Day. If you want to get in trouble with the IRS either withhold payroll taxes and don’t remit them to the IRS or pay your employees under the table (thus not being in compliance with trust fund taxes). Either method starts you quickly on the road to ClubFed.

Thomas Carbo of Wayne, Pennsylvania did the latter. He decided to improve his business’ profitability by paying his employees under the table. He did temporarily save on his payroll tax expense…until he was caught. He ended up defrauding the government out of $168,000.

He was apparently caught as a result of a kickback scheme in nearby Norristown. His business appears to have been a Norristown vendor. The government subpoenaed his records but he didn’t comply with the subpoena; he’s accused of destroying the records instead. The government then investigated, looked at his bank records, and then discovered the tax fraud.

Mr. Carbo has pleaded guilty to one count of conspiracy to defraud and 17 counts of failing to collect and submit the payroll taxes. While he faces up to 90 years in prison and a fine of up to $4.5 million, federal sentencing guidelines suggest he’ll receive a little over two years at ClubFed.

One of the surest methods I know to get the IRS upset with you is to withhold payroll taxes and not remit them. Payroll taxes are called trust fund taxes; I’ve yet to know of a time when the IRS hasn’t gone after a business that failed to remit those taxes. I’m also unaware of any case where the IRS hasn’t pursued a payroll service who failed to remit trust fund taxed on behalf of employers it serviced.

James McLamb, of Raleigh, North Carolina, was CFO of the Castleton Group. Castleton serviced about 100 employers in the Research Triangle area of North Carolina. Serviced, though, may be the wrong word to use for Castleton; scammed appears to be more apropos.

McLamb had a unique method of handling trust fund taxes. He’d calculate the correct amount of taxes, accept those remittances, and then change the numbers to much lower figures. He’d use the lower numbers to report payroll to the IRS and the North Carolina Department of Revenue. It’s unclear from the news story where the $8 million that was supposed to go to the IRS ended up; suffice to say it didn’t end up in the U.S. Treasury and likely lined McLamb’s pockets.

The fallout from this mess is what you’d expect. McLamb has pleaded guilty to defrauding the United States; he’ll likely be sentenced to a lengthy term at ClubFed later this year. Castleton is bankrupt; it’s owner blames McLamb for the company’s problems. The employers who trusted Castleton still have to remit the taxes to the IRS & North Carolina.

I strongly advise my corporate clients to use a reputable payroll service. This is not an area to skimp on—the penalties are high for mistakes and owners can and are held personally liable when mistakes occur. Finally, if you think that an idea like McLamb’s will work over the long term you’re badly mistaken. Trust fund taxes are heavily scrutinized and the government will come after you.

I used to work in Stockton. And I know that I have at least one reader who resides there (a former co-worker). He is probably already aware of the problems that the Sang family faces.

Richard Sang, his wife Amber Lao, and their sons Brooke Sang and Richie Sang own several restaurants: Mallards in Stockton and Modesto, the Cedar Creek Inn in Palm Springs, and the Fish Market and Grill on the Lake in nearby Mission Viejo. The Stockton Mallards closed in October; the Modesto Mallards closed in November. Many restaurants fail (it’s a very tough business). However, both Mallards failed in spite of the owners allegedly pocketing payroll taxes withheld for the state.

San Joaquin County Deputy District Attorney Sudha Rajender told the Stockton Record that “[The owners] were withholding [the taxes], but they were pocketing it.” In total, the four are facing 36 counts of fraud and tax evasion. The elder Sang has been through charges like these before; he was convicted on federal charges in Washington state in 1991.

Meanwhile, California’s Employment Development Department (EDD) has already fined the owners $100,000 for not having workers compensation insurance at the Modesto Mallards. And the owners are facing a $1.6 million lawsuit over defaulted loans and owe $10,000 to Stanislaus County for unpaid property taxes.

Currently, the Mission Viejo restaurant remains open. I hope that continues (at least for the short-term); I am part of a group that has a breakfast meeting there every Friday morning. Given that Mr. Rajender told the Marin Independent Journal, “I’ve never seen a case like this before. These guys have gotten away with this for some time, and nobody has been interested in prosecuting them before. It’s very complicated.” I suspect we may soon be looking for a new location to meet.

Modesto Bee Story Here