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Tax Protestor Dummies 2 > Cases
("Damn, We Lost Again!
And why is it
that people who sell
tax protestor materials file their tax returns anyway . . .")
Employment Tax Requirements
Employers are required by law to withhold employment taxes
from their employees. Employment taxes include:
The federal income tax is a "pay as you go tax." You
must pay the tax as you earn or receive income during the
year. For most employees this takes the form of income taxes
withheld from their pay. Self-employed persons are also required
to make estimated tax payments during the year. The pay as
you go system was designed to ensure that taxpayers meet
their tax obligations timely.
Social Security and Medicare taxes pay for benefits workers
and their families receive under the Federal Insurance Contributions
Act (FICA). Social security taxes pay for benefits under
the old age, survivors, and disability insurance part of
FICA. Medicare taxes pay for hospital benefits. Each employee
contributes part of these taxes and the employer pays a matching
amount. Self-employed taxpayers must also pay social security
and Medicare taxes in the form of self-employment taxes.
The Federal Unemployment Tax (FUTA) is another tax that
pays unemployment compensation to workers who lose their
Employers must report income and employment taxes withheld
from their employees on an Employer's Quarterly Federal Tax
Return (Form 941) and deposit these taxes in full to an authorized
bank or institution pursuant to Federal Tax Deposit Requirements.
Employers are also responsible for filing an Annual Federal
Unemployment (FUTA) Tax Return and depositing those taxes.
The programs funded by employment taxes provide essential
benefits to many citizens. The importance of the programs
will continue to grow as more citizens reach retirement age.
Voluntary compliance remains the cornerstone of our tax
system. Voluntary compliance means that for filing required
tax returns and paying the correct amount of tax. Noncompliance
with tax laws threatens the stability of our tax system.
Sometimes noncompliance results from lack of knowledge on
the part of the taxpayer. In these instances the Internal
Revenue Service (IRS) will work with the taxpayer to bring
them into compliance. It is in an employer's best interests
to file employment tax returns, pay, and deposit taxes timely.
Failure to do so can result in the imposition of a variety
of civil sanctions.
When taxpayers attempt to evade the employment taxes
they may be subject to criminal sanctions. These are the
most severe sanctions that can be imposed and often result
in the taxpayer being sentenced to a term of imprisonment,
fined and ordered to make restitution (in addition to other
Unscrupulous individuals and promoters advocating willful
noncompliance with the tax laws have used a variety of false
or misleading arguments for not paying taxes (employment
taxes.) The courts have repeatedly rejected these arguments
as frivolous and routinely impose financial penalties when
such meritless arguments are raised.
Evading employment taxes can have serious consequences for
employers and the employees. Employers may be subject to
criminal and civil sanctions for willfully failing to pay
employment taxes. Employees suffer because they may not qualify
for social security, Medicare, or unemployment benefits when
employers do not report or pay employment and unemployment
taxes. Consequently, taxes withheld and paid by compliant
employers are used to pay the refunds and social security
benefits of employees whose employers did not pay the withheld
To learn more about the requirements to pay taxes, read
the IRS brochure "Why
do I have to Pay Taxes" Publication 2105 (Rev. 10-1999)
Catalog Number 23871N.
Employment Tax Evasion Schemes
Employment tax evasion schemes can take a variety of forms.
Some of the more prevalent methods of evasion include pyramiding,
employee leasing, paying employees in cash, filing false
payroll tax returns or failing to file payroll tax returns.
"Pyramiding" of employment taxes is a fraudulent
practice where a business withholds taxes from its employees
but intentionally fails to remit them to the IRS. Businesses
involved in pyramiding frequently file for bankruptcy to
discharge the liabilities accrued and then start a new business
under a different name and begin a new scheme.
Employee leasing is another practice subject to abuse. Employee
leasing is the practice of contracting with outside businesses
to handle all administrative, personnel, and payroll concerns
for employees. In some instances, employee leasing companies
fail to pay over to the IRS any portion of the collected
employment taxes. These taxes are often spent by the owners
on a variety of business and personal expenses, and the company
dissolves, leaving millions in employment taxes unpaid.
Paying Employees in Cash
Paying employees in whole or partially in cash is a common
method of evading income and employment taxes resulting in
lost tax revenue to the government and the loss or reduction
of future social security or Medicare benefits for the employee.
Filing False Payroll Tax Returns or Failing to File Payroll
Preparing false payroll tax returns understating the amount
of wages on which taxes are owed, or failing to file employment
tax returns are methods commonly used to evade employment
IRS Criminal Investigation Employment Tax Evasion
During Fiscal Years 1998, 1999, and 2000, nearly 86 percent
of the persons convicted of evading employment taxes were
sentenced to an average of 17 months in prison and ordered
to make restitution to the government for the taxes evaded
(plus interest and penalties.)
Three Year Totals:
Three Year Average:
Average Months to Serve
*Incarceration includes confinement to federal prison,
halfway house, home detention, or some combination thereof.
Brothers; Owners of Construction Company Convicted
On February 16, 2001, Paul Buonopane and his brother Robert
Buonopane, owners of B&B Acoustical Contractors, Inc.,
were convicted of 29 counts including conspiracy to defraud
the IRS, conspiracy to commit mail fraud, aiding and assisting
in the presentation of false payroll tax returns, and mail
fraud directed at the company's workers' compensation insurance
carriers and the Massachusetts Carpenters' Union. Evidence
at trial indicated there was an under the table wages scheme
in which approximately $460,000 in payroll was concealed
from the company's payroll service, the IRS, the insurance
carriers of workers' compensation, and the Union. The hidden
$460,000 resulted in saving substantial amounts of employment
taxes, insurance premiums, and contributions to the union
fringe benefits funds which B&B owned. Sentencing is
scheduled for May 14, 2001.
Conviction of Former Hospital Administrator
On November 29, 2000, a federal jury convicted C. David
Morrison on 23 counts of financial related crimes including
tax evasion, money laundering, and embezzlement. Morrison,
administrator of Logan General Hospital, in Logan, West Virginia,
failed to pay more than $4.5 million withheld from Logan
General Hospital employees' paychecks for federal taxes in
In addition to the failing to pay $4.5 million in employment
taxes, the jury found Morrison guilty of diverting tax and
bond money toward the building of a mall project. Morrison
used hospital money to pay for his share in the purchase
of a $1.3 million private airplane. The payments used to
fund Morrison's ownership and upkeep of the aircraft were
structured in such as manner as to conceal the fact the hospital
was making the payments on Morrison's behalf. Hospital funds
were also used by Morrison and a business partner to keep
afloat their joint business, American Development Corporation,
and to renovate and pay off loans on a motel and several
On the opening day of the trial the judge rejected Morrison's
proposed plea agreement when Morrison refused to say that
he "intentionally" violated the law with his failure
to hand over the tax money withheld from employees' paychecks.
The financial crimes against Logan General Hospital and its
employees forced the hospital into Chapter 11 bankruptcy.
In August 2000, Albert Snow, the owner of two holistic food
stores and a bookstore located in Medway, Massachusetts and
North Smithfield, Rhode Island was sentenced to 3 years and
7 months in prison for evading and failing to pay over $500,000
in income taxes and payroll taxes, conspiring with others
to defraud the United States, making false statements to
banks, and paying unlawful gratuities to a public official.
Albert Snow doing business as Holistic Health Products,
operated two health food stores and a bookstore that sold
holistic supplements, foods, vitamins, and books. During
tax years 1993 through1998, he failed to file tax returns
or pay any income tax. To conceal his income, Snow required
all employees to accept their wages in cash, failed to withhold
payroll taxes, commingled his personal and business expenses,
and destroyed business records. In addition to the term of
imprisonment Snow was fined $100,000 ordered to be placed
on supervised release for a period of 5 years and ordered
to assist the IRS in determining his outstanding tax liability.
Split Payment Scheme
On August 25, 2000, Terry L. Harrison of Westmoreland, Tennessee
was sentenced to thirty consecutive weekends in jail, plus
120 days home confinement after pleading guilty to seven
counts of filing false Employer's Quarterly Income Tax Returns,
three counts of aiding and abetting the filing of those returns,
and one count of filing a false Individual Income Tax Return.
Harrison operates a mobile home transporting company, D&T
Transport, that employs drivers who operate company trucks.
From 1993-1995 Harrison split his drivers' pay between wages
and contract labor to evade paying the employer's share of
Social Security and Medicare taxes. Harrison also failed
to withhold income taxes on the portion of the wages he misclassified
as contract labor.
In addition, Harrison filed a false 1993 Individual Income
Tax Return failing to report over $54,000 of gross receipts
and claimed a false deduction of more than $30,000 to a drug
dealer who never provided services to his company. This scheme
was designed to provide Harrison with extra cash, substantiation
for illegal business deductions, and establish a "legitimate" source
of income for the drug dealer. In fact, Harrison wrote the
checks to the drug dealer, cashed them and kept the money.
As part of his sentence, Harrison was ordered to pay $155,
667 in restitution to the IRS, was fined $20,000 and ordered
to pay $1,368 per month toward the cost of his incarceration.
Corporation President Sentenced
In October 2000, John T. Eckelberger, Jr., President
and owner of Creative Employment Concepts, an employee leasing
company located in Dallas, Texas, was sentenced to six months
in prison, followed by six months home confinement, placed
on probation for 36 months and ordered to pay restitution
for his failure to pay more than $3.9 million in employee's
federal income taxes, social security, and Medicare taxes
during 1995. Eckelberger directed these funds be spent for
In June 2000 Eckelberger plead guilty to a four count information
charging him with violating Title 26, United States Code,
Section 7202, willfully failing to truthfully account for
and pay over "trust fund" taxes during 1995.
Machine Company Vice President Sentenced
In August 2000 Joann A. Reynolds, Vice President of D.
Reynolds Machine Co., located in Dover Ohio, was sentenced
to a year and a day in prison, and fined $3000 after pleading
guilty to two counts of failing to account for and pay over
federal employment taxes owing on the wages of Reynolds Machine
Co. employees and one count of filing a false federal income
Reynolds was charged in a 28 count criminal information
with failing to account for and pay over $62,360.36 of withheld
income taxes and employees' share of social security taxes
for the twelve calendar quarters during the period 1994 to
1996. The indictment also charged she failed to pay the employer's
share of social security taxes totaling approximately $ 21,876.81
for the same period and filed false income tax returns that
understated her and husband's joint total income for years
1993-1996 by approximately $44,604.
In the plea agreement Reynolds admitted responsibility for
all criminal conduct alleged in the indictment that resulted
in total unpaid employment and income taxes of $119,568.
Restitution for all unpaid taxes has been made.
In October 2000, Jeffrey l. Huff was sentenced to 15 months
in prison followed by three years of supervised release after
he pled guilty to seven felony counts of failing to withhold
and pay over employment taxes in violation of Title 26, United
States Code, Section 7202. Huff also pled guilty to knowingly
and unlawfully engaging in the practice of hiring illegal
During July 1996 to March 1998, Huff was doing business
as Huff Construction Inc. in Sebree, Kentucky (the principal
place of business for Huff Construction is Mississippi.)
Huff Construction was under contract to construct a large
number of poultry houses at various locations in Western
Kentucky. Huff employed a large number of workers from Mexico
knowing they were illegally in the United States Criminal
Investigation initiated an investigation after reviewing
Currency Transaction Reports (CTRs) prepared by a bank in
Sebree which revealed that large currency withdrawals were
being made from the Huff Construction account every Friday.
The investigation subsequently disclosed these withdrawals
were made to pay workers in cash. Huff failed to withhold
or pay over federal income taxes, social security, and Medicare
During the seven quarters in question, Huff reported total
wages of $449,455.97 on which the taxes due were $68,766.66.
However, an analysis of business records seized during the
execution of search warrant in June 1998 disclosed that Huff
actually paid $2,582,110.20 in wages during this period on
which total taxes of $395,062.36 were owed. Huff failed to
withhold or pay over a total of $326,296.20 in taxes. It
was disclosed during the investigation that Huff's CPA had
advised him that his workers did not meet the criteria for
independent contractors but Huff disregarded this advice
because he did not want to pay employment taxes.
Employee Leasing Company President
In 1998, Richard Dvorak, former President of Persona Management
Corporation, an employee leasing firm headquartered in Rhode
Island, was sentenced to 41 months in prison for filing seven
fraudulent quarterly payroll tax returns understating his
firm's employment tax liability by more than $13 million.
During 1992 and 1993, Persona Management Corporation "leased" almost
6000 employees to over 100 businesses. These businesses entered
into arrangements with Persona Management Corp. to turn their
employees over to Persona and then lease them back to realize
savings on health and workman's insurance, pension plan costs,
and payroll services.
Instead of paying employment taxes on these employees, Dvorak
used the money to support a lavish lifestyle purchasing a
$1.2 million yacht, a $1 million mansion, and a horse farm
in Connecticut. Dvorak spent $4 million renovating these
properties in addition to purchasing several luxury vehicles
and wiring over $1 million to Bermuda to invest in an offshore
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