Taxable Talk

I used to work in Stockton. And I know that I have at least one reader who resides there (a former co-worker). He is probably already aware of the problems that the Sang family faces.

Richard Sang, his wife Amber Lao, and their sons Brooke Sang and Richie Sang own several restaurants: Mallards in Stockton and Modesto, the Cedar Creek Inn in Palm Springs, and the Fish Market and Grill on the Lake in nearby Mission Viejo. The Stockton Mallards closed in October; the Modesto Mallards closed in November. Many restaurants fail (it’s a very tough business). However, both Mallards failed in spite of the owners allegedly pocketing payroll taxes withheld for the state.

San Joaquin County Deputy District Attorney Sudha Rajender told the Stockton Record that “[The owners] were withholding [the taxes], but they were pocketing it.” In total, the four are facing 36 counts of fraud and tax evasion. The elder Sang has been through charges like these before; he was convicted on federal charges in Washington state in 1991.

Meanwhile, California’s Employment Development Department (EDD) has already fined the owners $100,000 for not having workers compensation insurance at the Modesto Mallards. And the owners are facing a $1.6 million lawsuit over defaulted loans and owe $10,000 to Stanislaus County for unpaid property taxes.

Currently, the Mission Viejo restaurant remains open. I hope that continues (at least for the short-term); I am part of a group that has a breakfast meeting there every Friday morning. Given that Mr. Rajender told the Marin Independent Journal, “I’ve never seen a case like this before. These guys have gotten away with this for some time, and nobody has been interested in prosecuting them before. It’s very complicated.” I suspect we may soon be looking for a new location to meet.

Modesto Bee Story Here

There’s a sure-fire method to get the IRS upset with you. Just withhold trust fund taxes from your employees (FICA and income tax) and don’t send them to the IRS. I can almost guarantee you that bad things will happen to you.

And if at the same time you don’t file your annual FUTA (federal unemployment tax) returns and your personal income tax returns, the IRS may want to send you to ClubFed.

Just to make sure you get some attention you can also be accused of defrauding some of your customers. And as long as you’re going this route, you might as well allegedly defraud your investors.

That’s what Marengo, Illinois contractor John M. Volpentesta is accused of. He faces 23 counts of mail fraud, wire fraud, and tax fraud. He allegedly defrauded customers investors out of over $1 million and didn’t remit federal trust fund taxes of $164,999. And, yes, it’s alleged that he didn’t file the FUTA tax returns from 2003 – 2005 and that he and his wife didn’t file three years of personal tax returns. If found guilty, Mr. Volpentesta is looking at a lengthy stay at ClubFed.

Trial will probably be next summer in Rockford, Illinois.

We received an email regarding the post we did on Ace Tire & Parts. The owners of Ace are accused of violating federal employment laws and have each pleaded guilty to one count of tax fraud.

In any case, we were asked the following:

“just read your article. where did you get your information for bozo scheme failed? what makes you think these guys are going to club fed? what do you know about pa tax laws with regard to this case? isn’t this a rather common practice among small businessmen across the country? give me your thoughts.”

Well, as to where I got the information, it was published in multiple places, including the Pittsburgh Post-Gazette. I think they’re going to prison because of the nature of their crime. These individuals robbed what are called “Trust Fund” accounts. When I wrote, “And the DOJ and IRS really, really don’t like violators of employment tax laws.” And that’s what they did, to the tune of somewhere between $400,000 and $1,000,000.

As to whether this is a common practice, definitely not. Anyone who thinks that most small business owners steal from employment tax trust fund accounts needs to think that through. Do you really believe that most small business owners are tax cheats? Thankfully, most Americans do pay their taxes, and most business owners correctly forward the employment taxes they collect to the government.

Please don’t try this yourselves.

You have a successful business (in this case, Ace Tire & Parts of Coraoplis, Pennsylvania). You decide that you don’t have to pay payroll taxes; instead, you’ll make your employees checks payable to “Cash” and as reimbursements for nonexistent expenses. Your controller agrees to this highly illegal scheme. You save on payroll taxes and your employees avoid income taxes.

And then the IRS finds out.

The two owners of Ace Tire & Parts, Richard & John Schwartz, and the controller, Richard Connell, all pleaded guilty to one count of tax fraud. Given that the tax loss to the IRS was between $400,000 and $1 million, the three are looking at about three years at Club Fed and, I assume, restitution to the IRS. And I wouldn’t be shocked if the Commonwealth of Pennsylvania looks at this crime, too.

For the record, this kind of fraud rarely goes undetected. And the DOJ and IRS really, really don’t like violators of employment tax laws.