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  • Daniel Rodriguez

What happens when a small business owner is accused of tax fraud?

Those who open their own business likely know that they must be more than fluent with the service or product they intend to provide—they must also know how to navigate basic business matters. This can include negotiating a lease for commercial or office space, putting together employment contracts, and even navigating tax matters.

Although all come with their hurdles, few are more complex to navigate than tax matters. Business owners must comply with various regulations and the requirements can adjust depending on the circumstances. A failure to do so can result in an investigation and allegations of fraud. If the taxing authority can build a successful case, the business owner can face hefty financial penalties as well as potential imprisonment.

The feds take these matters seriously.

The Internal Revenue Service (IRS) is notoriously aggressive when it comes to business tax compliance. The agency often makes announcements about areas it focuses on for compliant matters. In a recent example, the agency announced a crackdown on fraud involving use of the Employee Retention Credit.

The agency’s efforts can steer off course. Tax professionals note that in addition to unscrupulous players, they are also seeing business owners with legitimate claims come under federal scrutiny.

This is also a state issue.

It is important for business owners to note that state taxes also apply, and state taxing authorities can be just as aggressive when it comes to questions of compliance. In a recent example, the California Department of Tax and Fee Administration (CDTFA) built a case against a restaurant owner from Riverside County. The agency claimed the entrepreneur failed to pay required sales taxes. The prosecution gathered evidence to argue that the business owner failed to report almost $10 million in sales over a span of five years. The state agency claims this resulted in over a million in lost taxes.

When faced with the evidence, the owner chose to accept a plea deal. He will serve 180 days at a county jail, have two years of probation, provide 240 hours of community service and make restitution payments. Thus far, he has paid $1,018,265 in restitution.

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