FY2006 Examples of Employment Tax Investigations

FY2006 Examples of Employment Tax Investigations

The following examples of employment tax fraud investigations are excerpts from public record documents on file in the court records in the judicial district in which the cases were prosecuted.

Local Business Owner Pleads Guilty in Employment Tax Scheme $318,385 in Federal Employment Taxes Evaded

On September 28, 2006, in Cincinnati, OH, David Weber plead guilty to a Bill of Information charging him with two counts of willful failure to file IRS Form 941, Employer’s Quarterly Federal Tax Return, relative to federal employment taxes for the second and fourth quarters of the 2003 income tax year. According to court documents and testimony, Weber owns and operates Best Design, Inc., a silk screening of textiles business in Cincinnati, Ohio. Best Design, Inc. employs between 18 and 22 employees. From January 2001 through September 2005, Weber paid wages totaling over $1.6 million to employees of Best Design, Inc. As an employer, Weber was required to file federal Forms 941 and pay federal employment taxes on his employees. Weber failed to withhold the federal income taxes on wages paid to his employees, failed to withhold the employee’s share of the employment taxes and failed to pay over any employment taxes. Best Design, Inc. used a payroll service that provided Weber with Forms 941 detailing the employment taxes owed, and Weber failed to mail these forms to the IRS. As a result of Weber’s failure to file his quarterly employment tax returns and not paying his employment taxes for the periods January 2001 through September 2005, the tax loss to the IRS was $318,385.

Husband and Wife Business Owners Failed to Pay Millions in Employment Taxes

On September 26, 2006, in Salt Lake City, UT, Steven and Diane C. Christensen, husband and wife, were each sentenced for conspiring to defraud the United States by attempting to impede the IRS's collection of federal income and employment taxes. Diane Christensen was sentenced to 41 months in prison, to be followed by three years of supervised release. Steve Christensen was sentence to 37 months in prison, to be followed three years of supervised release. According to the indictment, the Christensens were principals at various employee leasing and payroll businesses, including Wasatch Management Services, Paragon Business Solutions of America and Professional Staffing Advantages.On November 9, 2005, the Christensens pleaded guilty to a conspiracy charge and admitted that they knowingly diverted money that Wasatch Management Services had collected for the payment of employment taxes and used some of that money for personal expenditures. Because of the Christensens' conduct, Wasatch Management Services failed to pay its employment taxes to the IRS in 1995 and 1996. Diane Christensen also admitted that she filed multiple fraudulent employment tax returns. In addition, both defendants admitted that for tax years 1995, 1996 and 1997, they directed Wasatch Management Services, Paragon Business Solutions of America and Professional Staffing Advantages not to file corporate income tax returns and that they failed to file personal income tax returns. Diane Christensen's conduct cost the federal Treasury between $2.5 million and $5 million, and Steven Christensen's conduct between $1.5 million and $2.5 million in lost tax revenue.

Central Minnesota Business Owner Sentenced to Federal Prison for Failing to Pay Taxes

On September 18, 2006, in Minneapolis, MN, Scott R. Lennander was sentenced to 24 months in prison, ordered to serve three years of supervised release and to pay the taxes he owes for failing to pay more than $822,000 in federal income and employment taxes withheld from his employees. Lennander, the owner of five Minnesota construction companies, pleaded guilty in May 2006 to six counts of failure to pay taxes. According to court documents, two payroll companies were hired to prepare the payroll and employment tax information for his five companies. On a weekly basis, the two payroll companies notified Lennander of the amounts of federal income and employment taxes withheld from employee paychecks. Those amounts were required to be forwarded to the IRS. For 13 taxable quarters Lennander failed to remit $822,707 worth of withholdings to the IRS.

Ex-Machine Shop Manager Gets 6 Years for Tax Evasion

On August 17, 2006, in Scranton, PA, Patrick A. Lombardo was sentenced to 27 months in prison for tax evasion and failure to pay employment taxes totaling approximately $788,000. According to the indictment, Lombardo had formed a partnership by the name of Pateo Services, a machine shop, until filing for bankruptcy in late 2002. Lombardo disguised his ownership of the business but retained control over the office management and the finances of the partnership. From that position Lombardo proceeded to loot the employee deductions to finance a lavish lifestyle. The indictment also charged that Lombardo issued himself hundreds of thousands of dollars in the form of checks written to cash. It was also revealed during the trial that Lombardo had taken money that had been provided to him by Blue Cross to pay for round-the-clock nursing care for his dying son and had spent it instead of paying the nurses.

Missouri Dentist Sentenced for Failure to Pay Taxes

On July 17, 2006 in Kansas City, MO, Dentist Artis Lee Clark was sentenced to 12 months and one day in federal prison for failing to pay employee withholding taxes. Clark pleaded guilty in November 2005 and admitted that he withheld taxes from his employee’s wages and failed to send the $2,647 in tax money to the IRS.

Former Lawyer Sentenced for Failure to File Tax Returns and Employment Tax Fraud

On July 13, 2006, in St. Paul, MN, Scott Kimrey Goldsmith, the former owner and president of Goldsmith & Associates, a Minneapolis law firm, was sentenced to 33 months in prison to be followed by 3 years of supervised release. Goldsmith pleaded no contest in 2005 to four counts of failing to file federal individual income tax returns and twelve counts of failing to pay employee withholding taxes that he had collected. Goldsmith did not dispute the federal government’s claim that from 1999 through 2002, he paid himself approximately $1,350,000 in salary but never filed tax returns. Moreover, he did not object to the government’s allegation that between April1999 and March2002, he deducted money from employee paychecks for federal income taxes, social security, and medicare but failed to turn those funds over to the IRS. Court documents indicate that Goldsmith’s actions resulted in tax losses to the IRS and the Minnesota Department of Revenue in excess of $500,000.

Illinois Man Sentenced to 36 Months for Conspiracy and Money Laundering in a Scheme to Employ and Hide Illegal Aliens

On June 15, 2006, in Chicago, IL, Walter Truszkowski was sentenced to 36 months in prison followed by three years supervised release and ordered to pay a $60,000 fine for money laundering and conspiracy to defraud the United States in a scheme to hide and employ illegal aliens in the United States. In June 2005, Truszkowski pleaded guilty to providing cleaning services jobs to illegal aliens from Eastern Europe, not withholding taxes, social security or unemployment insurance payments. For his cleaning services, Truszkowski’s clients paid a subcontractor. He then laundered $274,319 through a corporation he owned and then through another cleaning company. The laundered funds were used to pay illegal aliens who worked for Truszkowski.

Nevada Strip Club Owner Pleads Guilty to Conspiring to Defraud the United States

On June 1, 2006, in Las Vegas, NV, Frederick John “Rick” Rizzolo, owner of “The Crazy Horse Too,” strip club, pleaded guilty to failing to report thousands of dollars in cash receipts. The Power Company, Inc., the parent corporation of his strip club, also pleaded guilty to racketeering and extortion. In addition, 16 other employees at the Crazy Horse Too pleaded guilty. According to court records, Rizzolo and The Crazy Horse Too, treated the club’s dancers as independent contractors and the dancers were required to pay about 15 percent of their earnings to the club. The club’s managers then distributed that money to other employees. The company failed to report or maintain records of the money and the employees underreported the cash payments they received to club bookkeepers. Additionally, club managers gave incorrect records to the club’s accountant, resulting in incorrect quarterly financial reports and tax returns. Employees received inaccurate W-2 forms that they used to file false individual income tax returns. Management of The Crazy Horse Too, including Rizzolo also filed quarterly federal employment tax returns which underreported the true amount of earnings received by the conspirators in order to hide the fraud. By failing to report or record the cash payments to the club’s employees, the owners of The Crazy Horse Too and the participating employees evaded and failed to pay approximately $400,000 in FICA taxes and Medicare taxes owed to the IRS on the unreported compensation. Rizzolo agreed to pay $1.73 million in restitution to the IRS and a $250,000 fine at the time of sentencing. The parent corporation agreed to forfeit $4.25 million and pay a $500,000 fine at the time of sentencing and to be jointly responsible with Rizzolo for payment of approximately $1.73 million in restitution to the IRS.

Podiatrist Convicted on Tax Charges

On May 22, 2006, in Ft. Smith, AR, Clifford B. Marston, a podiatrist who owns Sunshine Foot Clinic, Inc., was convicted on charges of income tax evasion, filing false income tax returns, and assisting in the preparation and presentation to the IRS of false individual income tax returns. Evidence at trial showed that Marston illegally stopped withholding employment taxes from his employees’ salaries during the fourth quarter of 1999. Additionally Marston began filing false Employers Annual Federal Unemployment Tax returns and false Employers Quarterly Federal Tax Returns in the last quarter of 1999 and continued to do so through the first quarter of 2001 claiming no federal wages were paid to employees, even though he continued to pay his employees wages. After the first quarter of 2001, Marston stopped filing all federal tax forms including employment tax returns and personal income tax returns. Testimony during the trial revealed that Marston also willfully assisted in and procured, counseled and advised others in the preparation of false income tax returns to be filed with the IRS. Evidence was presented that proved Marston provided two of his employees with false Forms W-2 reporting no wages earned for federal purposes, whereas Marston knew that he had paid these employees wages for the years involved.

Iowa Man Sentenced to Prison for Failing to Pay Employment Taxes

On May 18, 2006, in Des Moines, IA, Andrew Mark Armstrong was sentenced to 78 months in prison followed by three years of supervised release for failing to pay employment taxes and embezzling an employee benefit plan (401(k)) plan and an employee health care program. Armstrong was also ordered to pay $29,473.21 in restitution and fined $50,000. According to the indictment and evidence introduced at trial, Armstrong failed to pay federal withholding taxes for the fourth quarter of 1999, and all four quarters of 2000. Armstrong was also found guilty of embezzling more than $15,000 of employee 401(k) contributions between May and October 2000.Armstrong was further found guilty of embezzling more than $10,000 of employee health care contributions between June and September 2000.The evidence at trial showed that Armstrong diverted money from his company to lease more than 40 luxury vehicles.

Orange County Business Owner Sentenced to 27 Months in Prison for Submitting False Claim for Federal Employment Taxes

On April 3, 2006, in Los Angeles, CA, George Henry "Nick" Jesson was sentenced to 27 months in prison for submitting a false claim to the Internal Revenue Service that fraudulently sought a $61,388 refund of employment taxes. In addition to the prison term, Jesson was ordered to pay restitution of $215,454 to the IRS. Jesson admitted to falsely reporting to the IRS that he did not pay his employees any wages in 1997. However, his company, No Time Delay Electronics, paid $177,083.22 to Jesson, $273,236.20 to his wife and also paid wages to other employees. Jesson claimed a refund for all of the employment taxes paid by the company. The total refund requested for the employees was $215,454, of which $61,388 was the employment tax withholding from the wages of Jesson and his wife. Jesson took the $215,454 refund and used the money for his own personal use. Before filing a false Form 941c for No Time Delay Electronics for 1997, he unsuccessfully tried to get a refund of $61,388 (the taxes withheld on the wages paid to Jesson and his wife) by filing an IRS Form 1040X, an amended federal income tax return, for himself and his wife. In this filing, Jesson claimed that wages were not taxable income.

North Carolina Businessman Sentenced for Lying About Assets in Offer in Compromise Case

On March 14, 2006, in Greensboro, NC, Baxter Worth Paschal, Jr. was sentenced to 16 months, followed by one year of supervised release. Paschal was indicted on one count of obstructing and impeding administration of the tax laws. His chiropractic practice was assessed $163,861.25 for payroll taxes. Paschal filed an "offer in compromise" offering to pay the IRS $7,505 to resolve his tax debt. In his financial filings, Paschal claimed that his airplane was leased to a medical software company and omitted as an asset in an agreement to sell the accounts receivable of his chiropractic group to another chiropractor.

Findlay Business Man to Serve 27 Months for Failure to Remit Payroll Taxes in Excess of $3 Million

On January 30, 2006, in Toledo, OH, Tony M. Tate was sentenced to serve 27 months in prison, followed by three years supervised release for willful failure to pay employment taxes. Tate as co-owner, Vice-President, and operator of American Digital Technologies Corporation, Inc (ADT) was charged in April 2005 with willfully failing to account for and pay to IRS $3,213,753 in payroll taxes. The taxes represented both the payroll taxes withheld from the salaries of ADT employees in the amount of $2,350,603 and the contributory payroll taxes in the amount of $863,150 that ADT was required to pay to the IRS. According to his plea agreement, Tate admitted he was responsible for ADT’s compliance with its federal tax obligations. Tate further admitted he willfully caused ADT not to file 13 quarterly federal payroll tax returns (forms 941) for the calendar quarter ending December 1998 through the calendar quarter ending December 2001.

Businessman Gets More Than Three Years for Tax Evasion

On January 12, 2006, in Charleston, WV, Carl L. Kennedy, II, was sentenced to 40 months in prison for tax evasion and failure to collect or pay taxes. From 2000 to 2003, Kennedy, while serving as an officer and accountant of several corporations, willfully failed to pay to the IRS over $1 million in employment taxes withheld from employees’ wages. Kennedy provided employees of the companies with W-2 forms indicating that tax withholdings had been paid to the IRS when, in fact, they had not. In an effort to hide their tax scheme, Kennedy and others responsible for the preparation and filing of other state and federal tax returns for the companies, failed to file the business income taxes, and prepared false books and records which claimed that withheld taxes had been paid to the IRS. As a result of the scheme, the companies failed to pay $1,078,840.83 in taxes to the IRS, and $219,218 in employment taxes to the State of West Virginia. Kennedy also evaded approximately $510,040 in personal income taxes by failing to file Individual Income Tax Returns from 1999 through 2003. Kennedy attempted to conceal his misconduct by using his position as an accountant with the companies to ensure that a W-2 Form was not filed in his name with the IRS by his employers; using corporate funds for his personal benefit; and endorsing and cashing corporate checks for his personal use.

Wisconsin Man Goes to Prison for Tax Evasion

On December 5, 2005, in Madison, WI, Peter A. Ahl was sentenced to 14 months in prison to be followed by three years supervised release. Ahl pleaded guilty to a two count Information that charged him with willfully filing a false employment tax return, Form 941, for the year 2000; and a false income tax return, Form 1040, for the year 2000. Ahl formerly owned and operated the Main Pub and paid his bartenders in cash and there was no withholding for tax purposes. In addition, Ahl kept two sets of books and reported substantially lower receipts on his tax returns than were actually received by the business. The total tax evaded by Ahl during the years 1999 through 2001 was $105,920.

Texas Woman Sentenced to Prison Term for Tax Crimes

On December 2, 2005, in Houston, TX, Stella Nowak Walters was sentenced to 37 months in federal prison without parole for evading employment taxes and failing to report income to the IRS. In addition to the prison term, Walters was ordered to pay $6,000 in fines, to serve three years supervised release after her discharge from prison, and to cooperate with the IRS to secure payment of more than $9 million in back taxes. Walters pleaded guilty in February 2005 and was convicted of willfully attempting to evade and defeat employment taxes of Bruco Industrial Services, Inc., for the quarter ending March 31, 1999, by preparing a false and fraudulent Employers' Quarterly Federal Tax Return, IRS Form 941, and willfully making and subscribing a joint 1999 U.S. Individual Income Tax Return she knew not to be true and correct because the return failed to report approximately $198,956 of her income for that year. According to the plea agreement, Walters admitted that from at least as early as 1996 through part of 2003 she had evaded employment taxes of three corporations she controlled. Walters admitted that her tax evasion tactics for two of the corporations involved (1) filing no Form 941 when due and depositing something less than the amount of taxes due, (2) filing Forms 941 underestimating the amount of taxes due, and (3) filing a correct Form 941, but failing to make the required deposits of employment taxes. Walters admitted in the plea agreement that she tried to do the minimum amount of filing and of payment of employment tax deposits that would prevent the IRS from taking serious action against her. Walters also admitted to receiving over $1.1 million in consulting fees from two of her corporations between 1995 through 2001 without reporting that income on her personal tax returns. Walters evaded a total of approximately $8.6 million of the corporations' employment taxes, and admitted that the total amount of taxes owed on her personal income tax returns is approximately $500,000.

Minnesota Man Pleads Guilty to Employment Tax, Embezzlement and Perjury Charges