A Florida man was sentenced on April 11 to 18 months in prison, two years of supervised release, and ordered to pay $4,381,265.76 in restitution to the United States for willfully failing to pay employment taxes and willfully failing to file individual income tax returns.
According to court documents and statements made in court, the defendant controlled a network of interconnected healthcare companies operating under various names. Through one of his entities, a health employment service company, he employed over 600 people with an annual payroll exceeding $24 million. As such, he was required to withhold Social Security, Medicare, and federal income taxes from his employees’ paychecks and to pay those monies to the IRS each quarter, as well as to pay the companies’ portion of Social Security and Medicare taxes.
For more than a decade, the defendant was not compliant with his tax obligations and instead used the withheld taxes to enrich himself. In 2011, he did not pay two quarters of withheld taxes to the IRS. In 2012, the IRS began collection efforts, including by sending him notices about his unpaid taxes, and by meeting with him to help bring him into compliance. When that effort was unsuccessful, the IRS assessed the outstanding taxes against him personally. He paid the assessments in October 2014, but his compliance was short-lived. By the end of the following year, he was again withholding taxes from his employees’ paychecks and keeping the money.
From 2016 through 2019, the defendant withheld $7,432,223.80 of taxes from his employees’ paychecks, but did not pay those taxes to the IRS. While he was withholding taxes from the pay of his employees under the pretext of paying these funds to the IRS, he used over $1 million from his businesses’ bank accounts to purchase a yacht, transferred hundreds of thousands of dollars to his personal bank accounts, and used the business accounts for personal purchases at high end retailers. During this same time, he also did not pay $3,480,111 of his business’s portion of his employees’ Social Security and Medicare taxes.
By 2019, the IRS had assessed millions of dollars in civil penalties against him. Beginning with the 2018 tax year, he also stopped filing personal income tax returns, despite continuing to receive income, including a $360,000 salary from the employment services company and $450,000 in transfers from his business bank accounts.
In 2019, the defendant created a new business. He used a family member as the 99 percent nominal owner of that company, but he had ultimate control of the finances and operations. Through the new business, he transferred in 2020 just under $200,000 to a bank account titled in a family member’s name, over $250,000 to a bank account in his wife’s name, and over $800,000 in payments directly to third parties for his personal expenses, including clothing stores, department stores, and fishing retailers.
In total, he caused a tax loss to the IRS of $10,912,334.80.
Compliance Perspective
Issue
Payroll taxes must be deducted from each employee’s pay and submitted to the federal government according to the required schedule. Additionally, the employers’ portions of payroll tax contributions are required to be submitted routinely. Many states also have state taxes that are required to be withheld from employees’ paychecks and submitted to the state of residency. To minimize fraud in payroll, it is recommended that payroll steps be broken up between at least two individuals so that no one person is responsible for deductions, payroll processing, disbursement, and distribution of payroll. Violations of payroll management can be considered fraud and can result in fines and imprisonment.
Discussion Points
- Review your policies and procedures on payroll management, including collecting employment taxes and submitting them to the IRS. Update your policies as needed.
- Train appropriate staff on your procedures for processing payroll, collecting employment taxes, and submitting the taxes to the IRS. Ensure they understand both the legal obligations and the potential consequences of noncompliance.
- Periodically audit the payroll process to ensure that employment taxes have been collected appropriately and that these taxes have been reported to the IRS, including employer contributions.
*This news alert has been prepared by Med-Net Concepts, Inc. for informational purposes only and is not intended to provide legal advice.*