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Florida pass-through company tax evasion scheme ends in owners' jail time

The sentencing of the two Fort Myers businessmen this week comes as the Internal Revenue Service ramps up its compliance efforts on flow-through entities.

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Photo by Raze Solar on Unsplash

Reliable contractors are worth a fortune in Florida. The Sunshine State has its share of overcast and worse days, as made disastrously clear by major Hurricanes Ian in 2022 and Idalia this fall.

That's why it's so discouraging when home repair experts break bad. Like a pair of roofing contractors who cheated the Internal Revenue Service out of more than $1 million.

And more companies like theirs, a pass-through entity, will be in Internal Revenue crosshairs, as the agency is forming a new division to focus on such businesses.

$3 million unreported taxable income: The two men, whose names I'm not including here but which are in the Department of Justice (DoJ) announcement and official court filings, were co-owners of Marlin Construction Group LLC in Fort Myers.

The duo was charged with evading taxes in 2018 and 2019 on more than $3 million in business receipts.

During those years, the men diverted money from residential and commercial roofing customer checks made payable to their company by cashing the payments at check-cashing businesses in nearby counties, according to the DoJ.

The pair then used the company cash for personal expenses, according to investigators. The nonbusiness expenditures included jet-skis, boats, and vehicles.

IRS Criminal Investigation agents said that the scheme also included altering the roofing company's books and records to falsely underreport its gross receipts and income for the 2018 and 2019 tax years.

In addition, say investigators, the men gave the company's tax return preparers false information, resulting in the preparation of corporate income tax returns for those two years that did not accurately report all gross business receipts and income.

More unreported pass-through income: Compounding the tax trouble was the company's tax structure. The income from the false corporate returns flowed through to the Florida men's personal tax returns.

That meant that their 2018 and 2019 personal 1040 forms also were similarly false.

In total, from both fraudulent business personal tax returns, the two men's scheme cost the U.S. Treasury more than $1.13 million.

Each man pleaded guilty in April to a tax evasion charge. On Monday, Sept. 18, both were sentenced to serve time in prison.

One Marlin Construction co-owner will spend 18 months behind federal prison bars. His fellow tax evader received a nine-month prison term, to be followed by nine months of home confinement.

U.S. District Judge Sheri P. Chappell for the Middle District of Florida also ordered additional three years of supervised release each for the men after they serve their respective time, as well as fines of $50,000 and $75,000.

Tax felon friday_smallerTax Felon Friday: The Fort Myers businessmen's sentencing serendipitously coincided with a new IRS initiative to combat flow-through tax evasion.

The IRS announced this week that it is establishing a new division, using the added funds from the Inflation Reduction Act, to go after uncollected taxes sheltered in companies that pass their tax liability through to their individual owners, as was the case with the Florida roofing company.

These businesses, known as flow-through or pass-through entities, often take the legal designation of limited liability partnership, S-corporation, general partnership, and sole proprietorship.

However, these groups are not subject to the corporate income tax. Instead, income is passed through onto the income tax returns of the individual or corporate owners and taxed at their income tax rates. Pass-throughs are frequently used by higher-income groups and can be complex tax arrangements.

The new IRS pass-through division will be part of the agency's Large Business and International (LB&I) Division, which deals with businesses that have assets greater than $10 million. It's expected to be officially operational sometime late next year, but the IRS said its work involving pass-through taxes will continue to intensify in the meantime.

"This is an important change we will be making, and we will be working in the months ahead to efficiently and effectively transition to this new group," said LB&I Commissioner Holly Paz during her speech before a Tax Executives Institute meeting in New York.

The new pass-through group, noted IRS officials, is yet another part of the agency's new focus "to restore fairness in tax compliance by shifting more attention onto high-income earners, partnerships, large corporations and promoters abusing the nation's tax laws."

When the new pass-through compliance enforcement efforts produce more tax evasion guilty pleas or courtroom convictions, you'll find them in the ol' blog's end-of-week feature Tax Felon Friday.

In the meantime, you can catch up on previous tax crime posts, including those that were published long before I gave them a special designation, in the, what else, tax crimes category. You'll find this post at the top of that collection right now, so just scroll down for more.

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