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  • Daniel Rodriguez

Can I Face Federal Prosecution for State Tax Violations or Crimes in California?

Many taxpayers would understandably be taken aback by the proposition that the federal government could prosecute them for the violation of state tax laws. In fact, most taxpayers would probably expect to deal with the IRS or Department of Justice for alleged federal tax failures. However, when it comes to state tax obligations like sales tax and certain employment taxes, most people would expect to be audited or prosecuted by the relevant state tax agencies. In California, issues with state sales tax are handled by the Board of Equalization, while employment taxes are handled by the Employment Development Department.

And while this bifurcated view of tax enforcement responsibilities is held by many taxpayers, it may be overly simplistic. A recent federal tax prosecution of Chicago restaurateur over state tax issues may signal a new willingness in the Department of Justice to utilize wire fraud laws to combat tax fraud. If you have unresolved state tax issues, you may also need to think about the federal government and IRS.  Our Sacramento tax lawyers explain further below.

Restaurateur, the “Mayor of Chinatown,” Convicted on Federal Wire Fraud Charges Due to Alleged Tax Fraud

Tony Hu is a prominent Chicago businessman and restaurateur with at least 9 establishments. Hu served as something of an icon for the city’s Chinatown and was known as its “mayor” due to his community outreach. However, despite Hu’s success, certain fraudulent practices existed at his businesses.

According to prosecutors and Hu’s guilty plea, tax fraud and evasion efforts began in early 2010 and continued until September 2014. According to court documents, Hu instructed restaurant employees and managers to provide him with off-the-books reports of the restaurant’s actual sales. Working from these records, Hu would make alterations to reduce each restaurants gross revenues. Hu would then destroy the original report and present the altered reports as originals.

Other steps Hu took to avoid having the concealed income reported involved banning employees from making deposits into the corporate accounts. Instead, the restaurateur would simply use the cash to pay down certain debts and expenses. Some money was also deposited into Hu’s personal bank accounts.  In an attempt to cover up possible red flags from a restaurant’s lack of reports on cash income, cash receipts were used until the remaining amount was roughly 15 to 20 percent of credit card receipts. Hu also instructed employees to provide state tax agencies with false sales figures.

Wire Fraud & Money Laundering Charges May Represent a New Front in the Government’s Tax Enforcement Efforts

Due to falsely reporting sales figures to the Illinois Department of Revenue in May 2014, Hu was charged with wire fraud. Federal money laundering charges stemmed from the series of transactions in which Hu engaged to hide the scheme from state tax agencies. However, what is notable about this prosecution is that despite admitting to conduct that would have likely produced a conviction under 26 U.S.C. § 7206 or  26 U.S.C. § 7201, no federal tax charges were actually filed. Rather, the federal government prosecuted a routine tax case as a wire fraud matter.

The main reason why the federal government may be implementing this tactic is that penalties for wire fraud and money laundering are significantly greater than the penalties that can be imposed for federal tax crimes. Furthermore, while it is customary for judges to refrain from ordering maximum tax sentences, the same does not necessarily apply to wire fraud and money laundering penalties. Thus, the government could believe that increased consequences equals increased leverage in plea negotiations.

The short answer is, yes, you can face federal prosecution for alleged state tax crimes. However, federal prosecutors may strategically charge taxpayers with wire fraud and related charges due to the leverage they believe it can create.

When Facing Tax Problems and Tax Audits, Rely on a Sacramento, California Tax Lawyer

If you are facing state or federal tax charges, you need highly experienced and methodical counsel who handle cases like yours on a daily basis. At NewPoint Law Group, LLP, a Sacramento tax audit attorney will strive to level the playing field so that taxpayers can proceed through tax or other litigation strategically. To schedule a confidential consultation at our Roseville or Folsom, California law office, call 800-358-0305 or contact us online.

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