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Forensic Accounting and Fraud Examination Read Chapters 12 and 13 in Forensic Accounting and Fraud Examination.   Discuss the advantages and disadvantages of using covert operations and surveillance in a fraud investigation. Respond to a classmate’s post that has a different explanation for advantages and disadvantages of using covert operations. Politely address differences between your perspectives. REPLY TO DISCUSSION 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 PDF GENERATED BY PROQUEST.COM Page 1 of 7 https://lopes.idm.oclc.org/login?url=https://www.proquest.com/trade-journals/how-financial-documents-can-help-find-hidden/docview/2159620205/se-2?accountid=7374 https://lopes.idm.oclc.org/login?url=https://www.proquest.com/trade-journals/how-financial-documents-can-help-find-hidden/docview/2159620205/se-2?accountid=7374 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 PDF GENERATED BY PROQUEST.COM Page 2 of 7 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 PDF GENERATED BY PROQUEST.COM Page 3 of 7 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. PDF GENERATED BY PROQUEST.COM Page 4 of 7 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 PDF GENERATED BY PROQUEST.COM Page 5 of 7 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 PDF GENERATED BY PROQUEST.COM Page 6 of 7 Database copyright  2021 ProQuest LLC. All rights reserved. Terms and Conditions Contact ProQuest 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- financial-documents-can-help-find-hidden/docview/2159620205/se- 2?accountid=7374 Copyright: Copyright American Bar Association Fall 2018 Last updated: 2021-09-13 Database: ProQuest Central PDF GENERATED BY PROQUEST.COM Page 7 of 7 https://lopes.idm.oclc.org/login?url=https://www.proquest.com/trade-journals/how-financial-documents-can-help-find-hidden/docview/2159620205/se-2?accountid=7374 https://lopes.idm.oclc.org/login?url=https://www.proquest.com/trade-journals/how-financial-documents-can-help-find-hidden/docview/2159620205/se-2?accountid=7374 https://lopes.idm.oclc.org/login?url=https://www.proquest.com/trade-journals/how-financial-documents-can-help-find-hidden/docview/2159620205/se-2?accountid=7374 https://www.proquest.com/info/termsAndConditions http://about.proquest.com/go/pqissupportcontact 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? That’s identity theft. Visit IdentityTheft.gov to report identity theft and get a personal recovery plan. The site provides detailed advice to help you fix problems caused by identity theft, along with the ability to: • get a personal recovery plan that walks you through each step • update your plan and track your progress • print pre-filled letters and forms to send to credit bureaus, businesses, and debt collectors Go to IdentityTheft.gov and click “Get Started.” There’s detailed advice for tax, medical, and child identity theft – plus over thirty other types of identity theft. No matter what type of identity theft you’ve experienced, the next page tells you what to do right away. You’ll find these steps – and a whole lot more – at IdentityTheft.gov. https://identitytheft.gov/ https://identitytheft.gov/ What To Do Right Away Step 1: Call the companies where you know fraud occurred. ☐ Call the fraud department. Explain that someone stole your identity. Ask them to close or freeze the accounts. Then, no one can add new charges unless you agree. ☐ Change logins, passwords, and PINs for your accounts. Step 2: Place a fraud alert and get your credit reports. ☐ To place a free fraud alert, contact one of the three credit bureaus. 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 Get updates at IdentityTheft.gov/creditbureaucontacts. ☐ Get your free credit reports from Equifax, Experian, and TransUnion. Go to annualcreditreport.com or call 1-877-322-8228. ☐ Review your reports. Make note of any account or transaction you don’t recognize. This will help you report the theft to the FTC and 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/