Prime numbers; Power play; Great White sharks; and other highlights of recent tax cases.

Westbury, New York: Business owner Victor Aguayo has pleaded guilty to not collecting and paying over employment taxes from employee wages.

Aguayo was owner and president of Mabel Interior Design Inc., an interior painting business. He paid his employees some $3.6 million in cash wages but did not withhold or pay taxes from those wages. He also caused false quarterly returns to be filed that did not report those cash wages.

He caused a tax loss to the IRS of $545,743.

Sentencing is April 21. Aguayo faces up to five years in prison, as well as a period of supervised release, restitution and monetary penalties.

New Bedford, Massachusetts: Tax preparer Valentina Martinez, 50, has pleaded guilty to filing false returns to obtain fraudulent federal refunds.

Martinez worked for a national tax prep service. After preparing returns for clients and providing them copies, she added fraudulent claims for business deductions without clients’ knowledge and e-filed the returns.

Martinez caused the refunds to be deposited onto debit cards that she used to make ATM withdrawals and to pay for a Florida vacation and other purchases. Her scheme was discovered and her employment terminated when a taxpayer client complained to the prep service about a missing refund. By then, Martinez had already filed at least 12 false returns and caused more than $45,000 in losses to the IRS.    

Sentencing is March 6. The charge of theft of government money carries a maximum of 10 years in prison, three years of supervised release, a fine of $250,000 and restitution to the IRS. 

Palm Beach Gardens, Florida: Businessman Paul Walczak has pleaded guilty to not paying employment taxes and not filing his individual income tax returns.

Walczak controlled a web of interconnected health care companies operating under various names, including Palm Health Partners and Palm Health Partners Employment Services. At its peak, the latter employed more than 600 people and paid more than $24 million dollars annually in payroll.

From 2016 through 2019, Walczak withheld nearly $7.5 million in federal taxes from employees’ paychecks but did not pay over those taxes, despite having been penalized by the IRS in 2014 for not paying employees’ taxes. During this same period, Walczak also did not pay $3,480,111 of the business’s portion of his employees’ Social Security and Medicare taxes.

At the same time, he used more than $1 million from his businesses’ bank accounts to purchase a yacht, transferred hundreds of thousands of dollars to his personal bank accounts, and used the business accounts for personal spending at high-end retailers.

For 2019 through 2020, Walczak also did not file personal income tax returns.

Walczak caused a total tax loss to the IRS of $10,912,334.80.

Sentencing is Feb. 28. He faces a maximum of five years in prison for the employment tax charge and a year in prison for not filing income tax returns. He also faces a period of supervised release, restitution and monetary penalties. 

Independence, Missouri: Attorney John C. Carnes, 69, has pleaded guilty to evading $857,000 in income taxes.

Carnes admitted that he willfully attempted to evade paying his personal income taxes for 2012 through 2018. He kept his income in his attorney trust accounts, then withdrew cash to pay personal and business expenses.

Carnes had two trust fund accounts. He withdrew $444,527 in cash from one from 2016 through 2019 and $144,364 from the second from 2013 through 2015. He used the cash to gamble and pay personal expenses.

Carnes deposited $232,000 in fees received for services provided in the sale of the former Rockwood Golf Course property in November 2017 and the Missouri City Power Plant project, and other income, into his attorney trust accounts.

The total tax loss to the IRS for 2012 through 2018 totaled $618,949. He also had unpaid federal income tax for 1990 to 1993, 1996 to 2003 and 2005, totaling $175,590. Carnes also had Missouri unpaid income taxes totaling $62,922. 

From 2009 to 2020, the IRS continuously engaged in various forms of investigative and enforcement activity regarding his outstanding tax liabilities.

Carnes faces up to five years in prison. 

Lake Geneva, Wisconsin: William S. Gallagher, owner and manager of a swimming pool service and retail company, has pleaded guilty to one count of failure to truthfully account for and pay over federal employment taxes.

Gallagher’s company employed some 15 workers. For each quarter in tax years 2018 through 2020, Gallagher willfully failed to truthfully account for and pay over employment taxes. Dating back to 2014, the loss to the IRS totaled more than $606,000.

Sentencing is Jan. 30. Gallagher faces up to five years in prison and up to a $250,000 fine, as well as up to three years of supervised release after completing any imprisonment.

Jacksonville, Florida: Travis Morgan Slaughter and Tripp Charles Slaughter have pleaded guilty to conspiracy to commit mail and wire fraud and conspiracy to commit tax fraud related to a roofing business they operated.

Travis Slaughter has agreed to forfeit to the U.S. $2,780,947 he obtained from the mail and wire fraud offense and to pay $6,768,612 in restitution for the payroll tax loss, $2,780,947 for unpaid workers’ compensation insurance premiums and $271,217 for two paid workers’ compensation claims.

Tripp Slaughter has agreed to forfeit to the United States $416,800 he obtained from the mail and wire fraud offense and to pay $623,269 in restitution for the payroll tax loss, $416,800 for unpaid workers’ compensation insurance premiums and $137,778 for a paid workers’ compensation claim.

Since 2007, the Slaughters have operated a roofing business, first under the name Great White Construction, then under the name Florida Roofing Experts, and finally under the name 5 Star Roofing Services. Although the names changed, each business operated in the same manner, banked at the same financial institutions and employed the same employees. The company contracted with PEOs to prepare payroll checks for employees, after making deductions for payroll taxes, and to file payroll tax returns and forward tax payments to governmental authorities.

The company did not provide the PEOs with information about all the hours worked by, or all the wages due to, its employees. Instead, the company also paid the employees directly, with separate checks drawn on company bank accounts, and did not deduct payroll taxes from these checks. By paying employees with “split checks” — one from the PEO and one from the company — the company avoided paying the full amount of federal payroll taxes due.

During January 2017 through July 2020, the PEOs issued payroll checks to the employees totaling some $4,930,613, after deducting and paying over to the IRS the payroll taxes. During that same period, the company issued checks to the employees totaling some $18,545,845, with no payroll taxes being deducted or paid. The total unpaid payroll taxes on that amount were $2,768,377.

The PEOs also secured workers’ compensation insurance coverage for the company. The premiums charged by the workers’ compensation insurers were based on the total amount of payroll that the company reported to the PEOs. If the company had reported the actual amount of payroll, the insurers would have charged additional premiums totaling $2,780,947.

The Slaughters also underreported their personal income to the IRS. For 2014 through 2019, the total unpaid taxes due on Travis Slaughter’s unreported income totaled $2,467,183. For 2015 through 2019, the total unpaid taxes due on Tripp Slaughter’s unreported income totaled $263,614.

They each face a maximum of five years in prison for the tax fraud and up to 20 years in prison for the mail and wire fraud. 

Private collection agencies have recovered only about $2.4 billion in tax debt payments since April 2017 out of the $64.9 billion assigned to them by the Internal Revenue Service, according to a new report.

The report, released Thursday by the Treasury Inspector General for Tax Administration, examined the impact of the IRS’s private debt collection program. A 2015 highway transportation law known as the Fixing America’s Surface Transportation Act, or FAST Act, revived the program after the IRS had shut it down in 2009 due to claims that taxpayers were being harassed by private collection agencies and the IRS could do a more cost effective job of collecting outstanding tax debts. TIGTA found that since April 2017, the IRS has assigned the PCAs more than 7.6 million taxpayer accounts, worth more than $64.9 billion. By March 2024, the PCAs had successfully collected more than $2.4 billion in payments. 

The 2015 law requires TIGTA to conduct a biannual review of the program. On July 1, 2019, President Trump signed into law the Taxpayer First Act, which contains significant changes to the administration of the IRS’s private debt collection program, TIGTA noted. The changes included adjustments to PCA case inventory criteria intended to protect certain low-income taxpayers from being subject to PCA collections as well as an increase in the maximum length of installment agreements that private collectors can offer taxpayers. 

TIGTA reviewed 100 randomly selected telephone call recordings from Oct. 1, 2021, to Sept. 30, 2023, for all three private collection agencies under contract with the IRS, and found that assistors generally adhered to the guidelines and provided quality service to taxpayers, achieving an overall accuracy rate of 97.8%. The IRS also conducted operational reviews of the PCAs and made 45 and 88 recommendations, in fiscal years 2022 and 2023, respectively. Recommendations included revisions to and refresher training on policy and procedures and programming updates. Over 92% of the recommendations were implemented on a timely basis. 

The IRS mandates background checks for all PCA employees working on taxpayer accounts. Before their background checks are completed, the IRS can grant interim staff-like access to personally identifiable information such as a taxpayer’s name and Social Security Number provided PCA employees pass prescreening checks. TIGTA’s review found that 796 PCA employees were granted access. Of those granted access, 11 PCA employees received a Proposal to Deny Letter due to security concerns identified in their background investigation, and staff-like access should have been immediately suspended. However, TIGTA found the IRS does not readily track when interim staff-like access is suspended and whether it is immediate. These 11 PCA employees could have retained access to sensitive taxpayer information.  

TIGTA’s review of PCA incident logs identified 10 incidents that were improperly categorized and potentially violated the Fair Debt Collection Practices Act for disclosing tax debt information to unauthorized third parties. The IRS issued a procedural update in May 2024 to clarify incident reporting and categorization. 

The IRS and/or the PCAs didn’t always follow policies and procedures for handling misdirected payments, TIGTA found. In eight of the 45 misdirected payments reviewed, the IRS did not post the payment to either the taxpayer’s account or the tax year listed on Form 3210, Document Transmittal, and Form 4287, Record of Discovered Remittances.  

TIGTA made five recommendations in the report, suggesting the IRS should develop a process to confirm that PCA employee system access is suspended immediately upon the issuance of a Proposal to Deny Letter. TIGTA also recommended ongoing reviews of the private debt collection program include a review of contracting officer representative and PCA responsibilities, and establish a review process that ensures that PCA misdirected payments are properly posted to the taxpayer’s account. The IRS agreed with all five of TIGTA’s recommendations and has either taken or plans to take corrective actions. 

“We are fully committed to ensuring all contractors meet federal security and suitability standards,” wrote Lia Colbert, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “Initial background investigations are performed prior to the contractor working on the contract and are revalidated every five years thereafter.”

The Internal Revenue Service’s program for destroying sensitive paper documents needs to be improved after an inspector general’s report found its contractor was leaving many of the documents easily accessible from open containers and storage bins.

The Treasury Inspector General for Tax Administration released a report Thursday faulting the IRS’s sensitive document destruction program. TIGTA found during some of its site visits to IRS facilities that sensitive documents had been stored in open containers. During other site visits, TIGTA discovered bin disposal slots that had been altered or left in poor condition, allowing ready access to discarded sensitive documents. TIGTA evaluators found bins in which they were able to reach their hands through the bin disposal slot and easily retrieve discarded sensitive documents.

TIGTA

The inspection came after TIGTA’s Office of Inspections and Evaluations received a referral from its Office of Audit regarding concerns about the IRS’s sensitive document destruction program. The evaluation found that improved management oversight is necessary to ensure sensitive documents are properly safeguarded prior to destruction. 

The problems seem to be related to a change in contract terms. The IRS changed its billing criteria in its national contract for sensitive document destruction in fiscal year 2022. The national contract, which covers 387 IRS facilities across the country, went from weight-based billing to billing based on the number and type of bins. 

“When the IRS pays for actual sensitive document destruction services rendered, it is being good stewards of its operating budget,” said the report. “In addition, the proper collection and destruction of sensitive documents ensures the protection of tax information until it is destroyed. However, when billing concerns arise or when sensitive documents get exposed to unauthorized disclosure or access prior to destruction, the IRS could be paying for services not received or disclosure law fines. In addition, the IRS could face an erosion of the public trust, which could adversely affect voluntary compliance, the foundation of our nation’s tax system.”

The report comes at a critical time for the IRS, when it faces the prospect of a $20.2 billion cut in its enforcement funding from the Inflation Reduction Act because the continuing resolution that Congress passed last week to avoid a government shutdown repeated language from an earlier continuing resolution that had mandated a previous $20.2 billion cut. 

TIGTA noted that the IRS receives and creates a significant volume of sensitive documents and is responsible for protecting sensitive documents from receipt to disposal. It found the IRS has not established or communicated to personnel at its various facilities the standard operating procedures for sensitive document destruction to ensure uniformity and consistency. IRS officials did not know what specific sensitive document destruction procedures were used at 110 of its facilities. 

The IRS no longer performs on-site inspections at facilities where sensitive documents are brought for destruction to ensure proper disposal, the report noted. Instead it seems to leave the job to its contractor and subcontractors. The IRS contracts the job to a national vendor that relies on local subcontractors to complete the destruction of sensitive documents. 

But the IRS didn’t put in place appropriate processes and procedures to ensure billing with its main contractor was accurate. TIGTA’s review of invoices paid for October 2023 found charges for more bins than reported by the vendor as being retrieved for destruction. The IRS didn’t determine the optimal number, type or size of bins needed at its facilities. 

TIGTA made 12 recommendations in the report, suggesting the chief of facilities management and security services at the IRS should develop standard operating procedures for sensitive document safeguarding and destruction; immediately evaluate the 110 facilities to ensure sensitive document safeguards and destruction procedures are in place; replace bins that have been damaged and altered; perform annual inspections of all facilities used by subcontractors for sensitive document destruction; complete a cost-benefit analysis to ensure optimal bin size and number of bins at all facilities; and develop processes and procedures to ensure that the IRS is only paying for full bins serviced. IRS officials agreed with seven of TIGTA’s 12 recommendations and agreed in principle to the other five recommendations. 

The IRS’s most recent contract includes provisions requiring site inspections by a National Association for Information Destruction certified inspector, the IRS noted in response to the report. The IRS contract now requires for the first time that all vendors be NAID certified. 

“IRS staff who discard [sensitive but unclassified] materials with regular trash and recycling are violating long-established policies on which they were trained during orientation and about which they receive refresher training annually,” wrote Julia Caldwell, acting chief of facilities management and security services at the IRS, in response to the report.

The IRS agreed to establish a communication plan to provide more frequent periodic reminders to employees as well as put up posters on sensitive document destruction at all IRS locations. 

Caldwell noted that due to a change in industry standards from billing by weight to billing by bin, bin fill rate data are not required for contract performance, and contended that requiring the contractor to document bin fill rates for all bins serviced would not add value to the sensitive document destruction process. Her department does not have enough personnel to staff every IRS location, she pointed out, especially the smaller, remote locations, and it would be too costly to travel to those locations to verify service on the document bins.