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Tax Crimes and Why Employers Should Be Concerned

For the May/June edition of Cityview Magazine, I wrote an article entitled "Tax Crimes and Why Employers Should be Concerned." A copy of the article can be found here: http://www.cityviewmag.com/2014_03/#p=136

The text of the article is duplicated below:

In 2013, the Internal Revenue Service launched over 5,300 criminal tax investigations of individuals and companies suspected of breaking one or more federal criminal tax statutes. While the majority of the IRS is focused on collecting money, the Criminal Investigation Division (CID) of the IRS spends its time and resources investigating suspected tax evaders. Locally, the Tennessee Department of Revenue also investigates Tennessee residents and companies who may have violated Tennessee's criminal tax statutes. An increasing number of these investigations are targeting small business owners.

Many people often associate tax evaders with persons who are tax protesters or famous celebrities. The reality though is that the majority of tax prosecutions will be against "regular" people who are neither famous nor actively flaunting their disagreement with American tax laws.

For a federal criminal case, the prosecution must prove 3 things:

1. Tax Liability or Tax Deficiency: The actual existence of a due and outstanding liability must exist in order for the IRS to prove that a taxpayer attempted to avoid the assessment and/or payment of his/her tax.
2. Affirmative Act: The actual completion of a voluntary and intentional act in order to avoid one's known legal income tax responsibility including the assessment and/or the payment of a tax.
3. Intent / Willfulness: Any effort or attempt to avoid the assessment and/or payment of a tax. Examples of acts which may constitute criminal intent in this regard may include:


  • Filing a false tax return

  • Creating false records such as invoices and receipts

  • Deliberately destroying records

  • Making false statements to an IRS agent

  • Claiming false deductions

  • Concealing bank accounts and/or assets

  • Cash structuring

While there is no such things as a "debtor's prison" in the U.S., an emerging trend in tax prosecutions is indicting business taxpayers who have taken affirmative action to avoid payment of payroll taxes. The Government views failure to provide payment for payroll taxes as theft, as the employer has taken money from an employee and failed to pay the withheld amounts to the IRS.

An example of this sort of prosecution occurred in the case of United States v. James and Theresa DeMuro. The DeMuros operated an engineering and surveying company out of New Jersey. The evidence at their trial showed that they withheld over a half million dollars from their employees' checks but failed to turn over this money to the IRS. They also had attempted to evade tax responsibilities by shutting down a different company in what the government believes was a strategy to evade payment of unpaid employment taxes for that entity. The convicted couple also withheld money from employees' checks for health insurance, retirement accounts, and child support, but they failed to provide these funds to the appropriate agencies or accounts.

After a jury found them guilty of willfully failing to pay employment taxes to the IRS, the DeMuros each received 44-month prison sentences and were ordered to pay restitution of $1,337,952.12 to the IRS.

Another emerging trend in tax prosecutions is the increase in prosecutions against staffing companies and PEO's (Professional Employment Organizations). These types of companies often handle the processing of payroll for their clients, who are usually small businesses. These staffing companies and PEO's are also required to pay over payroll taxes to the IRS, and when the companies do not satisfy this requirement, they too could face criminal prosecution.

A recent example of this trend involves Richard Whatley, who was the owner of multiple staffing companies in Utah. The prosecution contended that Whatley's actions in failing to turn over payroll taxes from 2001 to 2006 resulted in a loss of more than $2.3 million in tax revenue. Whatley ultimately entered into a plea agreement and was sentenced to 51 months in prison for willfully failing to pay employment taxes to the IRS. He was also ordered to pay a fine of $541,513.

As the IRS continues to increase collection efforts, business owners should be wary of any acts that could be perceived as efforts to evade reporting or paying employment-related taxes. Smart business practices would be to never use taxes withheld from an employee's check for any purpose other than its intended use. If a small business owner or other decision makers have already failed to turn over withheld employee funds, the owner and decision makers should immediately contact a qualified tax professional to take immediate steps to correct past mistakes and provide protection from the long arm of the law.

Norman McKellar is the founder of The McKellar Law Firm, PLLC and the winner of multiple Cityview Top Attorney awards. His practice primarily deals with IRS tax resolutions and federal criminal defense. More information on his law firm can be found at www.HelpingClients.com, or follow him on Twitter @McKellarLawFirm.


Staffing Company Owner Sentenced to 51 Months in Prison for Failing to Pay Payroll Taxes

July 31, 2013, by The McKellar Law Firm, PLLC

A growing area of tax fraud is originating from staffing companies and PEO's (Professional Employer Organizations) who withhold taxes from their workers and fail to turn the withheld funds over to the IRS. A case earlier this month resulted in a former owner of such a company receiving a 51-month prison sentence for committing such a crime.

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Richard Whatley, who was once part owner and/or financial controller for three staffing companies located in Utah, was indicted in 2010 for five counts of willful failure to account for and pay over employment taxes for these businesses which were under his control from 2001 to 2006. Prosecutors alleged Whatley's infractions resulted in the loss of more than $2.3 million in tax revenue.

Whatley struck a plea deal in his case in which he accepted a sentence of 51 months in prison and a fine of $541,513 in exchange for a plea of guilty to one count of willful failure to account for or pay over taxes. Whatley admitted to prosecutors that while he did collect fourth quarter taxes from employees of one of his staffing companies in 2003, he did not turn over the money to the IRS. T

26 USC ยง 7203 states that any persons found to have willfully failed to account for or pay over taxes to the IRS are subject to a fine up to $25,000 for an individual or $100,000 for a corporation. The statute also declares that the individual, if convicted, will be charged with a felony and could face up to five years in prison.

To determine the meaning of "willfulness" one must turn to the case law of Cheek v. United States, 498 U.S. 192, 201 (1991), United States v. Pomponio, 429 U.S. 10, 12 (1976), and United States v. Bishop, 412 U.S. 346, 360 (1973). These cases determined willfulness to be defined as the "voluntary, intentional violation of a known legal duty." Courts do not require direct proof of willfulness. Instead, the court can infer by the behavior or acts of a defendant that his or her conduct had the effect of misleading or concealing the desired information from the government. Spies v. United States, 317 U.S. 492-499 (1943). This conduct includes any efforts by the defendant that the court infers had the intention to "place assets beyond the government's reach after a tax liability has been assessed." United States v. Mal, 942 F.2d 682, 687 (9th Cir. 1991).

This was not Whatley's first brush with law. He previously served 27 months in prison for mail fraud and interstate transportation of stolen funds. He completed probation for these crimes in November of 2003.

New Jersey Couple Sentenced to 44 Months Imprisonment for Failure to Pay Employment Taxes

December 6, 2012, by The McKellar Law Firm, PLLC

As a Tennessee tax attorney, I often represent small business owners who are delinquent in paying their payroll taxes, which are commonly referred to as an owner's "941 taxes." While the majority of these types of clients are seeking to resolve their tax debts with the Internal Revenue Service by civil means, a few of these cases are criminal in nature. Simply put, the Government views failure to pay provide payment for payroll taxes as theft, as the employer has taken money from an employee's check and failed to pay the withheld amounts to the IRS.

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According to a press release from the Department of Justice, James and Theresa DeMuro of New Jersey each received 44-month prison sentences for conspiracy to defraud the Government and twenty-one counts of failing to pay payroll/employment taxes. The couple was also ordered to pay restitution of $1,337,952.12 to the IRS.

The couple's sentence came after a jury trial, where evidence was introduced that the couple withheld over a half-million dollars from their employees, but failed to pay any of this money to the IRS. The convicted couple also withheld money from employees' checks for health insurance, retirement accounts, and child support, but they also failed to provide these funds to the appropriate agencies or accounts. Instead, evidence was introduced showing that the DeMuros spent nearly $300,000 for purchases from Home Shopping Network, QVC, and Jewelry Television.