7-2 - Accounting
Forensic Accounting and Fraud Examination
Read Chapters 12 and 13 in Forensic Accounting and Fraud Examination.
Discuss the background regarding Identity Theft. What are the stops to investigating this type of theft and what resources would an investigator use? Additionally, what resources would individuals have to recover? Give a specific example of a type of Identity Theft and discuss one way to prevent it. Comment on another classmate’s selection of a different type of Identity Theft than you described. Provide at least one solution to prevent the Identity Theft your classmate addresses. In your opinion, which type of Identity Theft would be most difficult to repair?
How Financial Documents Can Help Find Hidden
Income
Brend, Jeffrey W; Fletchall, Jennifer M . Family Advocate ; Chicago Vol. 41, Iss. 2, (Fall 2018): 34.
ProQuest document link
ABSTRACT (ENGLISH)
[...]attempt to determine whether personal expenses of the party are being paid by the business. There are
employee benefits that should be scrutinized, including the accident and health plan, medical reimbursement plan,
meals and lodging, dependent care reimbursement, commuter passes, parking, tuition reimbursement, moving
expense reimbursement, VITA (volunteer income tax advice) programs, professors family tuition waivers,
employee achievement awards, employee discount, group term life insurance, cafeteria plans, health spending
accounts, flexible spending accounts, group legal services, group life insurance, disability insurance, accident and
health benefits, and dependent care benefits. Some specific kinds of income/expense distortions may include
shipping goods before a sale is finalized, reporting revenue when important uncertainties exist, recording revenue
when future services are still due, recording income on the exchange of similar assets, recording funds from
suppliers as revenue, using bogus estimates on interim financial reports, boosting profits by selling undervalued
assets, boosting profits by retiring debt, failing to segregate unusual and nonrecurring gains or losses, improperly
capitalizing costs, depreciating or amortizing costs too slowly, failing to write off worthless assets, reporting
revenue rather than a liability when cash is received, failing to accrue expected or contingent liabilities, failing to
disclose commitment and contingencies, engaging in transactions to keep debt off the books, accelerating
discretionary expenses into the current period, and writing off depreciation or amortization for future years.
Furthermore, unlike the Wiretap Act, the Stored Communications Act does not contain an express prohibition of
the use of electronic communications obtained in violation of the Act. [...]while information obtained in violation of
the Stored Communications Act may subject a party to criminal and civil sanctions, the information obtained may
be admissible in court.
FULL TEXT
An attorney or accountant should obtain several common financial tracking documents when seeking to ascertain
whether a partys assets and/or income are being distorted or intentionally hidden.
Personal Documents
Large or unusual checks can provide useful information to a forensic examiner. An examination of the back of a
check negotiated by the suspect party or subject business may show unknown bank accounts being used by the
party or business. Payroll checks, for instance, may show a spouses money being funneled through an employee.
In addition, hidden liabilities and assets may be found by obtaining a credit report. A credit report that contains
joint information can be obtained by either spouse; however, bear in mind that it is illegal to obtain or use an
unauthorized credit report.
Obtaining loan and leasing applications, prior divorce decrees, tax returns, and W-2s for the party often also
provides useful information. With W-2s, specifically, examine each of the boxes, as these contain important
information regarding pensions, deferred compensation, dependent care benefits, etc. From these documents, you
should always attempt to determine whether the alleged income matches the lifestyle of the parties.
Business Documents
Several business documents can prove valuable in tracking assets or determining income. Comparative
statements for as many years as possible can alert you to nonrecurring, unusual, or extraordinary financial
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occurrences. The general ledgers of the business should be reviewed by your client for entries that appear out of
the ordinary. Particular attention should be paid to the cost of goods sold, repairs, outside services, and expenses
of the business. In addition, be sure to obtain any buy/sell agreements adopted by the business. Finally, attempt to
determine whether personal expenses of the party are being paid by the business.
Any business documents obtained should be reviewed to determine whether the business is utilizing an accrual or
cash basis of accounting because that may significantly alter income. For example, a business using the accrual
basis of accounting can manipulate both its income and assets by simply making a journal entry that adjusts its
accounts receivable. Other adjustments to income or irregularities hidden in the journal entries may also be
discoverable.
Financial Statements
When reviewing financial statements, always make sure the financial statements correlate with the underlying
books and records of the business. There are certain general financial abuses you should be looking for, such as
the duplicate processing of income or expenses; the recording and reporting of transactions before they occur; the
shifting of current income or expenses to a later or earlier period; whether profits or losses are the results of
nonrecurring transactions; whether income is being assigned to business partners, family members, and/or close,
personal friends; and whether there are income timing differences due to accrual versus cash basis of accounting.
There are also some common financial abuses that will not be recorded in the financial statements or underlying
books and/or records of the business. These include unrecorded promises and commitments; unrecorded or
pending legal liabilities; unrecorded sales, receipts, and disbursements in separate, unrecorded accounts;
inadequate or incomplete disclosures; use of funds for illegal payments and transfers; hidden interests in joint
ventures; transfers at other than fair value; and insider trading.
In addition, the following specific areas should be examined to protect your clients rights:
1. cash versus accrual accounting method,
2. compensation,
3. interest income,
4. dividend income,
5. tax-free exchanges,
6 rents,
7. pension income,
8. personal injury damages,
9. illegal or unreported income,
10. depreciating assets, and
11. other nonreported income.
Business owners can use one of two methods of accounting for their companys books and records. A cash basis
accounting method records revenue and expenses when cash is received or paid, while an accrual basis of
accounting records revenues and expenses when they are incurred, regardless of when cash is exchanged. If a
business utilizes an accrual method of accounting, then you will see Accounts Receivable and Accounts
Payable on their income statements. Businesses have the ability to distort their revenue or expenses in a given
time period depending on which method of accounting they use. Accounts receivables is the primary cash-
accounting-versus-accrual-accounting method that can dramatically affect the amount of revenue reported. Watch
for unreasonable write-offs of accounts receivable as uncollectible. View aged accounts receivable. Determine if
orders are booked as accounts receivable when an order is placed or shipped. Depending on the jurisdiction,
accounts receivable can create a double-dipping issue whether they are an asset or next months income.
In trying to calculate income, there are many ways a person can be compensated for services. The predominant
method is salary or wages, which includes overtime, holiday pay, vacation pay, and sick days. Other forms of
compensation include tips, bonuses, restricted stock units, stock options, incentive stock options, commissions,
severance pay, golden parachutes, cash payments, side jobs, petty cash, travel and entertainment
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reimbursements, property payments, barter, and deferred compensation.
There are employee benefits that should be scrutinized, including the accident and health plan, medical
reimbursement plan, meals and lodging, dependent care reimbursement, commuter passes, parking, tuition
reimbursement, moving expense reimbursement, VITA (volunteer income tax advice) programs, professors family
tuition waivers, employee achievement awards, employee discount, group term life insurance, cafeteria plans,
health spending accounts, flexible spending accounts, group legal services, group life insurance, disability
insurance, accident and health benefits, and dependent care benefits.
Pensions can be another overlooked form of compensation. Some employer plans include profit-sharing plans,
money-purchase plans, defined-benefit state and federal plans, and union and private employer plans. Look closely
at the W-2 to see if a box is checked identifying an employer plan. Also watch for employer matching in defined
contribution plans such as 401(k)s and 403 (b)s. Annuities are not reported on tax returns when purchased. Lump-
sum distributions can be rolled over to an IRA or another qualified plan.
Some interest income does not immediately appear on tax returns. EE Savings Bonds are tax deferred until the
bonds mature or are redeemed. They are often part of the contents of safe deposit boxes. Federal obligations are
not subject to state tax. State and local bonds are not subject to federal tax.
A type of dividend income that can go undetected is constructive dividends. These types of dividends can arise
from shareholders paying personal expenses through their business. Such expenses can include home or cellular
phones, a company car used for personal use, personal meals and entertainment, reimbursement of commuting
expenses, withdrawals or shareholder loans above salary without obligation of repayment, personal vacations
tacked on to business trips, and household expenses. Completing a yearly comparative analysis of the businesss
expenses to find irregularities disguised as constructive dividends is strongly recommended.
Rents can be manipulated to distort income. Examine leases for back-loaded rental leases that may, up front, give
free rent for higher payments at the end of the lease. Alternatively, the free rent can be straddled around a divorce.
A tenants improvements can be stipulated in a lease that then affects the rent paid. Determine if a tenant is
bartering services for lower rent. Are relatives or friends not paying fair market value?
Have you accounted for security deposits in escrow?
Personal injury damages are usually tax free, but the interest on the tax-free amount is still taxable and will be
reported on a tax return. Look for a sudden increase in interest.
Other kinds of nonreported income include life insurance proceeds, withdrawals and loans, gifts and bequests,
scholarships and fellowships, parsonage housing allowances, and, of course, illegal or unreported income. Ask a
simple question: Does cash flow match lifestyle?
Tax Returns Corporate Returns
On corporate returns, look closely at Schedules M-l and M-2. Form 1120, page four, provides for book versus tax
income (i.e., tax-exempt interest, key man life insurance, cash versus accrual adjustments, etc.). On the Schedule
M-l, you need to add back book adjustments for federal income tax to net income per book to equal taxable income
on Form 1120. Look to add back capital losses in excess of capital gains. Adjust for income subject to tax though
not recorded on books. Adjust for expenses reported on books though not deductible, such as adjustments for
meals and entertainment, key person life insurance premiums, excess depreciation, contributions carryover, and
foreign tax credits. Conversely, on Schedule M-l, adjust for income recorded on books though not included on the
tax return, such as tax-exempt interest and key person life insurance proceeds. Adjust for deductions not charged
against book income, including depreciation (straight line versus accelerated), contribution carryover, and capital
loss carryover.
On Schedule M-2, account for unappropriated retained earnings and review opening and end-of-year balance
figured on Schedule M-2 and entered on Schedule 1, note distributions, pending lawsuits, declines in inventory
values, any sinking fund for capital expenses, purchase of treasury stock, appropriations with bond holders or
creditors, and prior period adjustments for change in accounting principles.
Examine all partnership and S corporation K-ls for amounts distributed to a partner, which may not be the same
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amount as that reported as income.
Personal Returns
When reviewing a partys tax returns, be aware of certain items that can help you identify undisclosed assets. For
example, retirement, Keogh, and simplified employee pension (SEP) contributions, which can be found in the
adjusted gross income section on IRS Form 1040 and on the face of business tax returns, may be used as a
vehicle to divert compensation into retirement investment activities. This is particularly important if the
compensation would have otherwise been included in calculations for child support and maintenance or if the
retirement account in question is a nonmarital asset.
Pay close attention to IRS forms and schedules. Form 1040 Schedule A may have state tax deductions that may
identify undisclosed income from another state, real estate tax deductions that identify undisclosed real assets,
and investment and interest expenses that may identify undisclosed investment assets. The inventory reported on
IRS Form 1040 Schedule C Part III, Costs of Goods Sold, is often approximated, which impacts the business
income reported. General business credits reported on IRS Form 3800 may identify undisclosed assets, and
foreign tax credits reported on IRS Form 1116 may identify undisclosed foreign assets.
Some specific kinds of income/expense distortions may include shipping goods before a sale is finalized, reporting
revenue when important uncertainties exist, recording revenue when future services are still due, recording income
on the exchange of similar assets, recording funds from suppliers as revenue, using bogus estimates on interim
financial reports, boosting profits by selling undervalued assets, boosting profits by retiring debt, failing to
segregate unusual and nonrecurring gains or losses, improperly capitalizing costs, depreciating or amortizing
costs too slowly, failing to write off worthless assets, reporting revenue rather than a liability when cash is
received, failing to accrue expected or contingent liabilities, failing to disclose commitment and contingencies,
engaging in transactions to keep debt off the books, accelerating discretionary expenses into the current period,
and writing off depreciation or amortization for future years. Ask yourself: does inventory or do supply purchases
make sense in light of revenue reported?
Sidebar
JEFFREY W. BREND (jbrendOlevinbrend.com), a partner at Levin &Brend, P.C., in Chicago since 1991, is both a
certified public accountant and an attorney. He focuses his practice on financial mediation and litigation in family
law, business valuation, and forensic accounting. Brend is the only person in the country who is an AAML fellow
and an Accredited Senior Appraiser with the American Society of Appraisers and Association of Certified Fraud
Examiners. He also has the ABV designation with theAICPA. He is a financial expert qualified to value businesses
and complete forensic financial investigations nationwide; an AAML Certified Family Law Arbitrator; past president
of the AAML Illinois Chapter; a past chair of the Matrimonial Law Committee of the Chicago Bar Association; a
member of the adjunct faculty at Chicago-Kent School of Law; and a frequent speaker and writer on topics related
to forensic accounting, business valuation, tax, and other domestic relations financial issues.
JENNIFER M. FLETCHALL ([email protected] levinbrend.com), a partner at Levin &Brend, P.C., in Chicago since 2001, is
both a certified public accountant and an attorney. With seventeen years of litigation experience in family law,
Jennifer is also a trained mediator and trained arbitrator, as well as a collaboratively trained attorney and financial
neutral. Fletchall has been recognized as an Illinois Super Lawyer Rising Star every year since 2011 and was
chosen for inclusion in the 2015-18 publication of The Best Lawyers in America for Family Law and Collaborative
Law and as an Emerging Lawyer in the Leading Lawyers Network from 2016-18. She focuses her practice in the
areas of mediation of family law matters, collaborative law, business valuation, and forensic accounting.
E-Tracking
E-tracking has become an important device for financial tracking purposes to ascertain whether a partys income
and/or assets are being distorted or intentionally hidden. Unlike paper documentation, electronic documents are
not easily deleted or destroyed, and they may contain valuable information such as a creation date and which
computer or person created the document. They may be easier to navigate using search functions in large
volumes of documents.
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However, attorneys and clients should be careful when accessing electronic documents so that they do not run
afoul of the Federal Wiretap Act and the Federal Stored Communications Act. Acquisition of a communication,
such as an email on a computer, during its transmission is a violation of the Wiretap Act. A defense to Wiretap Act
violations is that a person had prior consent to such interception. 18 U.S.C. §2511(2)(d). Consent may be express
or implied and, if a party consents to the interception of a portion of a communication, a court must inquire as to
whether the interception exceeds the scope of the consent. Blumfoe v. Pharmatrak, Inc. (In re Pharmatrak, Inc.
Privacy Litig), 329 F.3d 9, 23 (1st Cir. 2003).
The circuits were previously split on whether there was a spousal exception to the Wiretap Act. Today no circuit
recognizes a spousal exception to the Wiretap Act, and, therefore, one spouse may be liable to the other spouse for
violating the Act. Glazner v. Glazner, 347 F.3d 1212, 1215-16 (11th Cir. 2003). The issue then becomes whether
evidence obtained from a violation of the Wiretap Act is admissible in court. The answer is no. The Wiretap Act
expressly prohibits the use of any wire or oral communication intercepted in violation of the Act from being
admitted in any trial, hearing, or other court proceeding. 18 U.S.C. §2515.
Just as consent is a defense to Wiretap Act violations, so too is consent a defense to Stored Communications Act
violations. Pharmatrak, 329 F.3d at 16-17. Violations may result in fines, imprisonment, or both. 18 U.S.C.
§2701(b). An aggrieved party may also be entitled to civil relief under the statute, including equitable or declaratory
relief, damages, and reasonable attorney fees and litigation costs. 18 U.S.C. §2707(a)-(b). In contrast to the
Wiretap Act, the contents of electronic communications obtained in violation of the Stored Communications Act
may be disclosed or otherwise shared with others unless the disclosing party is the provider of an electronic
communication service. Wesley College v. Pitts, 974 F. Supp. 375, 389 (D. Del. 1997) (citing 18 U.S.C. §2702(a)).
Furthermore, unlike the Wiretap Act, the Stored Communications Act does not contain an express prohibition of
the use of electronic communications obtained in violation of the Act. Thus, while information obtained in violation
of the Stored Communications Act may subject a party to criminal and civil sanctions, the information obtained
may be admissible in court.
For discovery purposes, the parties are entitled to full disclosure regarding any matter relevant to the subject
matter involved in a pending action. The term documents is usually broadly defined to include communications
and electronically stored information such as writings, sound recordings, and any other data or data compilations
in any media from which electronically stored information can be obtained. This means that even if one spouse
takes a computer used by the other spouse and that computer was used for both personal and business purposes,
there may not be a violation of any statute. Byrne v. Byrne, 650 N.Y.S.2d 499, 500 (Sup. Ct. 1996). In Byrne, the
court analogized a computers memory to a filing cabinet containing financial documents located in the marital
residence, which is obviously subject to discovery. Id. See also Etzion v. Etzion, 796 N.Y.S.2d 844 (Sup. Ct. 2005).
- J.W.B. &J.M.F.
Reasons for a Forensic Analysis
Businesses often manipulate revenues, expenses, assets, and liabilities on financial statements for a specific
purpose. The reason or reasons a business may distort income may or may not be legitimate and legal.
Some of the common reasons a business owner might understate a companys assets and revenues are that the
owner is seeking to get divorced, pay less federal and state tax, pay less rent when rent is based on revenue
earned, make future earnings look better when management is newly appointed, and/or negotiate legal
settlements. Some of the reasons a business owner might overstate a companys financial strength and
performance are to obtain additional credit from lenders, make the company more attractive to investors, earn
greater management bonuses and sales commissions, establish a stronger track record of earnings, lower costs of
loans, avoid filing for bankruptcy, induce prospective buyers, and/or list the company on a stock exchange.
One way that attorneys can help parties resolve an impasse is by finding an impartial means of generating a
solution. On important issues such as valuation, taxes, tracing questions, and characterization issues or related
problems, an impartial solution may mean finding a professional or a method that both parties will trust or at least
consider. In litigation, parties resolve (and sometimes create) such differences by using various kinds of experts. If
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the parties can agree on a single expert or a single method or approach to address the issue, they can lessen the
controversy and also lessen the cost of finding the necessary information. When one party in a divorce believes
that the other party is not providing full disclosure of information or is in some way distorting the information
provided, it may be prudent for that party to retain a forensic accountant.
In the context of a financial investigation, the accountant can assist the parties in numerous ways. He or she can
enable the parties to decide how to gather all the pertinent information, understand the scope of the property to be
divided, and appreciate the available choices for dividing the assets and the consequences (e.g., tax
consequences) of such choices. The accountant can ultimately help the parties draft an agreement to present to
their attorneys for review, and he or she can provide a neutral, third-party point of view.
Ordinarily, business decisions relating to the operation of a business and reporting of income are decided long
before a divorce is contemplated or without regard to a pending divorce. Judges can consider the reasons why a
partys income and assets as reported by a business should not be the same as the partys income and assets
within the context of the divorce proceeding. Often such reasons provide a strong argument for eventually
persuading a court to equitably divide assets and set a spouses income level in a manner compatible with the
accountants theory of the case, rather than as indicated by the records of the business.
In the event that financial issues are litigated, the courtroom presentation of evidence can be a deciding factor in a
judges decision. As such, it is imperative to remember the Boy Scout motto: Be prepared. The attorney should
spend adequate time preparing the forensic accountant for testimony. It is important to sequence the forensic
accountants testimony so it is easy for the judge to follow. This approach will also help lay the proper foundation
and paint a picture for the court. The expert should be encouraged to explain as much as possible in laymans
terms and use demonstrative evidence to highlight the facts relied on to develop his or her opinion.
- J.W.B. &J.M.F.
DETAILS
Subject: Interest income; Compensation; Dividends; Group legal services; Forensic
accounting; Group life insurance; Savings bonds; Income taxes; Defined contribution
plans; Deferred compensation; Cash basis accounting; Financial statements;
Accounts receivable; Pensions; Stock options; Credit reports; Cost control; Tax
returns; Accounting records; Capital losses; Wages &salaries; Foreign tax credits;
Books; Adjustment; Meals
Business indexing term: Subject: Interest income Compensation Dividends Group legal services Forensic
accounting Group life insurance Savings bonds Income taxes Defined contribution
plans Deferred compensation Cash basis accounting Financial statements Accounts
receivable Pensions Stock options Credit reports Cost control Tax returns
Accounting records Capital losses Wages &salaries Foreign tax credits; Industry:
54119 : Other Legal Services 56145 : Credit Bureaus 54112 : Offices of Notaries
52411 : Direct Life, Health, and Medical Insurance Carriers
Classification: 54119: Other Legal Services; 56145: Credit Bureaus; 54112: Offices of Notaries;
52411: Direct Life, Health, and Medical Insurance Carriers
Publication title: Family Advocate; Chicago
Volume: 41
Issue: 2
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First page: 34
Publication year: 2018
Publication date: Fall 2018
Publisher: American Bar Association
Place of publication: Chicago
Country of publication: United States, Chicago
Publication subject: Law
ISSN: 0163710X
e-ISSN: 23278331
Source type: Trade Journal
Language of publication: English
Document type: Feature
ProQuest document ID: 2159620205
Document URL: https://lopes.idm.oclc.org/login?url=https://www.proquest.com/trade-journals/how-
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Copyright: Copyright American Bar Association Fall 2018
Last updated: 2021-09-13
Database: ProQuest Central
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How Financial Documents Can Help Find Hidden Income
18 Main Street Practitioner AUGUST 2017
Continued on the following page
Justice Department Sends Stern Warning to Employers with
Continuing Crackdown on Employment Tax Fraud
Matthew D. Lee
***
Ensuring that employers collect and pay over to the
Internal Revenue Service taxes withheld from their
employees’ wages is one of the highest priorities of the Justice
Department’s Tax Division. Unpaid employment taxes are
a substantial problem for the U.S. government, as amounts
withheld from employee wages represent nearly 70 percent of
all revenue collected by the IRS. As of June 30, 2016, more
than $59.4 billion of federal employment taxes remained
unpaid, and employment tax violations represent more than
$91 billion of the “Tax Gap,” which represents the difference
between the amount of taxes owed to the U.S. Treasury and
the amount actually collected. In this context, several recent
criminal prosecutions demonstrate the perils businesses, and
their officers, face if they fail to carry out their legal duty to
remit employment taxes to the IRS.
Background
Employers have a legal responsibility to collect and
pay over to the IRS taxes withheld from their employees’
wages. These employment taxes include withheld federal
income tax, as well as the employees’ share of social security
and Medicare taxes (collectively known as FICA taxes).
Employers also have an independent responsibility to pay the
employer’s share of FICA taxes. The IRS takes the position
that when employers willfully fail to collect, account for, and
deposit with the IRS employment tax due, they are stealing
from their employees and ultimately, the U.S. Treasury. The
IRS also contends that employers who willfully fail to comply
with their obligations and unlawfully line their own pockets
with amounts withheld are gaining an unfair advantage over
their honest competitors.
The Justice Department’s Tax Division pursues civil
litigation to enjoin employers who fail to comply with their
employment tax obligations and to collect outstanding
amounts assessed against entities and responsible persons.
In the last two years, in an effort to send a clear message
to delinquent employers who treat taxes withheld from
employee wages as a personal slush fund or loan that can be
put off or ignored entirely, the Justice Department filed 55
injunction complaints in federal courts across the country
and obtained 47 permanent injunctions. These injunctions
require the timely deposit of employment tax and filing of
employment tax returns, prompt notice to the IRS after
each deposit, and notice to the IRS if the employer begins
operating a new business. In addition, the injunctions
preclude employers from assigning property or making
payments to other creditors until the company’s employment
tax obligations are paid.
The Tax Division also investigations and prosecutes
individuals and entities who willfully fail to comply with
their employment tax responsibilities, as well as those who
aid and assist them in failing to meet those responsibilities.
According to former Principal Deputy Assistant Attorney
General Caroline D. Ciraolo, “[t]he willful failure to comply
with employment tax obligations is a crime – plain and
simple. Stealing employee withholdings and failing to pay
them over to the U.S. Treasury, gives dishonest employers an
unfair advantage over their law-abiding competitors.
19 Main Street Practitioner AUGUST 2017
Continued on the following page
The department will continue to work with the Internal
Revenue Service to prosecute these offenders and level the
playing field.”
Recent Employment Tax Criminal Cases
On January 26, 2017, two West Virginia business owners
were sentenced to prison for failing to pay over employment
taxes. Michael Taylor and his wife, Jeanette Taylor, were
sentenced to serve 21 months and 27 months in prison,
respectively. According to documents filed with the court,
from 2000 through 2010, the Taylors owned and operated
a construction business that transported steel and sold
gravel and concrete throughout West Virginia and Kentucky.
The Taylors changed the name of the business several
times, though the operations of the business remained the
same. From 1999 to 2004, the business was operated as
Taylor Contracting & Taylor Ready-Mix LLC. In 2004,
the name changed to Taylor Contracting/Taylor Ready-Mix
LLC. In 2010, the name changed a third time to Bluegrass
Aggregates. Both Michael Taylor and Jeanette Taylor were
responsible for collecting, accounting for, and paying over
to the IRS federal income taxes and social security and
Medicare taxes that were withheld from the wages of their
employees. From July 2007 through 2010, the Taylors
withheld over $850,000 from their employees’ paychecks,
but instead of paying over the withheld taxes to the IRS, the
Taylors used the funds to purchase property and finance their
horse farm. The Taylors also failed to pay over $490,000
in employment taxes for their prior business. The total tax
loss for the Taylors’ conduct is $1.4 million. In addition to
the term of prison imposed, Michael Taylor was ordered to
pay $1,440,130 in restitution to the IRS. Jeanette Taylor was
ordered to pay $766,273 jointly and severally with Michael
Taylor to the IRS.
On January 12, 2017, a Pittsburgh tax attorney was
sentenced to four years in prison for failing to remit
employment taxes to the IRS. According to court documents
and the evidence presented at trial, between 2004 and
2015, Steven Lynch co-owned and operated the Iceoplex
at Southpointe, a recreational sports facility located in
Washington County, Pennsylvania. Iceoplex included a
fitness center, ice rink, soccer court, restaurant and bar.
Lynch controlled the finances for these businesses and
was responsible for collecting, accounting for, and paying
over tax withheld from employee wages, and timely filing
quarterly employment tax returns. The jury found that
between 2012 through 2015, Lynch failed to timely pay over
to the IRS more than $790,000 in taxes withheld from the
wages of the employees for these businesses. In addition to
the prison term sentence, the Court ordered Lunch to pay
$793,145 in restitution to the IRS.
On December 15, 2016, an Iowa businessman was
sentenced to 13 months in prison after pleading guilty to
failing to pay employment taxes. Darrell Smith was the
president and general partner of Energae, which was a
minority investor in Permeate Refining LLC., an ethanol-
production business in Hopkinton, Iowa. In his position at
Energae, Smith had significant control over the finances of
Permeate and was responsible for paying over to the IRS
employment taxes on behalf of Permeate’s employees. From
the first quarter of 2011 through the third quarter of 2012,
Smith failed to pay over $502,863. After Smith discovered
that a subordinate employee had made some payments to
the IRS, Smith stopped that employee from making further
payments.
On October 24, 2016, the owner of several Nevada
landscaping and rock hauling businesses was sentenced to 10
months in prison for failure to pay over employment taxes.
In addition, the company’s bookkeeper was sentenced to five
years’ probation with three months home confinement for
willful failure to file an employment tax return. According
to documents filed with the court, Kyle Archie was the part
owner of Reno Rock Inc., GKPA Inc., and D Rockeries
Inc. Kyle Archie admitted that he was responsible for the
day-to-day operations of the businesses and that from 2003
through 2009, he had a legal duty to collect, truthfully
account for, and pay over employment taxes to the IRS.
He further admitted that although he collected these taxes
from his employees’ wages and held them in trust, he failed
to pay them over to the IRS for the third quarter of 2008.
Linda Archie, who is Kyle Archie’s mother, worked as
the bookkeeper for Reno Rock Inc., GKPA Inc., and D.
Rockeries Inc. and was responsible for maintaining the books
and records of the companies and filing documents with
various government agencies. She admitted that between
2003 and 2009, she failed to file employment tax returns on
behalf of these businesses to account for the taxes that were
withheld from the employees’ wages. The Court also ordered
both Kyle and Linda Archie to pay restitution to the IRS in
the amount of $1,235,528.
Conclusion
These criminal cases demonstrate the harsh consequences
that employers face if they willfully fail to comply with their
legal duty to collect and remit employment taxes. Such cases
will not simply be addressed civilly by the IRS with back
payment of taxes and penalties by the employer, but instead
20 Main Street Practitioner AUGUST 2017
may be criminally prosecuted and with responsible corporate
officers facing prison sentences. This is particularly the case
if the withheld taxes are used to pay personal expenses of
the business owners and/or to fund luxurious lifestyles.
The Justice Department and IRS are especially focused
on “pyramiding,” which refers to the common practice of
repeatedly filing bankruptcy once a substantial employment
tax liability has accrued and opening a new business entity
so as to avoid the payment of employment taxes, as occurred
in the Taylor case described above. And the “willfulness”
legal standard is not particularly difficult for prosecutors to
satisfy, as nearly all employers are aware of their obligation
to remit taxes withheld from their employees’ paychecks.
Employers must take special care to ensure that withheld
employment taxes are property remitted to the IRS given
the intense focus now being paid to this area by the Justice
Department and IRS.
About the Author:
Matthew D. Lee is a former U.S.
Department of Justice trial attorney who
focuses his practice in the areas of white-
collar criminal defense and investigations,
federal tax controversies, financial
institution regulatory compliance and
complex civil litigation. Matt represents
companies and individuals in federal
grand jury investigations and criminal
prosecutions in a wide variety of areas,
including tax, money laundering, health
care, securities, public corruption, antitrust,
Foreign Corrupt Practices Act, False Claims
Act and fraud offenses.
Copyright of Main Street Practitioner is the property of National Society of Accountants and
its content may not be copied or emailed to multiple sites or posted to a listserv without the
copyright holders express written permission. However, users may print, download, or email
articles for individual use.
FEDERAL TRADE COMMISSION
IdentityTheft.gov
Identity Theft
What to know, What to do
https://identitytheft.gov/
Is someone using your personal or financial information to
make purchases, get benefits, file taxes, or commit fraud?
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Go to IdentityTheft.gov and click “Get Started.”
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theft – plus over thirty other types of identity theft. No
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steps – and a whole lot more – at IdentityTheft.gov.
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What To Do Right Away
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Ask them to close or freeze the accounts. Then, no one can add
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That company must tell the other two.
• Experian.com/help
888-EXPERIAN (888-397-3742)
• TransUnion.com/credit-help
888-909-8872
• Equifax.com/personal/credit-report-services
800-685-1111
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☐ Get your free credit reports from Equifax, Experian, and TransUnion.
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☐ Review your reports. Make note of any account or transaction you
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the police.
Step 3: Report identity theft to the FTC.
☐ Go to IdentityTheft.gov, and include as many details as possible.
Based on the information you enter, IdentityTheft.gov will
create your Identity Theft Report and recovery plan.
https://www.experian.com/help/
https://www.transunion.com/credit-help
https://www.equifax.com/personal/credit-report-services/
https://identitytheft.gov/creditbureaucontacts
https://www.annualcreditreport.com/index.action
https://identitytheft.gov/
https://identitytheft.gov/
Go to IdentityTheft.gov for next steps.
Your next step might be closing accounts opened in
your name, or reporting fraudulent charges to your
credit card company.
IdentityTheft.gov can help – no matter what your
specific identity theft situation is.
September 2018
FEDERAL TRADE COMMISSION
IdentityTheft.gov
https://identitytheft.gov/
https://identitytheft.gov/
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