The Internal Revenue Service takes great pleasure in auditing individuals who own their own small businesses.  Why target these “moms and pops?”  For the simple reason that they often deal in cash and keep two sets of books.  Add in possible sales tax violations and before you know it auditors from the state revenue department have joined in the action.

One such person who found that out the hard way is Philip Kossoy, a forty-nine year-old man from Freehold, New Jersey.  According to a press release issued by the New Jersey Attorney General’s Office, Mr. Kossoy was sentenced to 364 days in jail after being convicted of tax evasion.  What crime did he commit?  He grossly underreported revenue from his home cleaning business.  In so doing, he paid significantly less tax than he should have.

According to records obtained from the New Jersey Attorney General’s Office, Mr. Kossoy was sentenced on two charges: (1) theft by failure to make required disposition of property received and (2) failure to pay taxes.  As if jail time was not bad enough, Mr. Kossoy also had to pay stiff penalties.  Previously, Mr. Kossoy paid the state of New Jersey $1.1 million, including $900,000 in unpaid taxes, penalties and interest, plus a $200,000 anti-money laundering penalty.  In addition, Mr. Kossoy forfeited $424,000 from bank accounts seized by the state, and paid the remaining $676,000 at the plea hearing.

Mr. Kossoy’s tax crimes were not just limited to unpaid income tax.  It also included unpaid sales tax and corporate taxes.  So what type of business did Mr. Kossoy own?  A mold remediation business.  What did Mr. Kossoy do to draw the ire of the IRS?  Mr. Kossoy’s tax evasion scheme consisted of the following:

• Failing to report cash transactions;

• Allowing customers to make checks payable to him instead of his business; and

• Opening up an account using another person’s name.

Unfortunately for Mr. Kossoy, cash businesses, altered checks, and nominee accounts are huge red flags for tax auditors.

With tax season right around the corner, we can expect to see a big spike in tax evasion cases making the news.  Indeed, the IRS attempts to time indictments, guilty pleas, and sentencing hearings to coincide with the 1040 filing season.  And for obvious reasons.  The hope is that others will be deterred when they hear about jail sentences being meted out in tax evasion cases.

To that end, taxpayers like Mr. Kossoy are essentially pawns used by the state to send a message to other business owners thinking about cheating on their taxes.  In that respect, Mr. Kossoy is the twenty-first century version of Hester Prynne – the protagonist in Nathaniel Hawthorne’s classic, “The Scarlet Letter” – who was made to wear the scarlet letter as a result of having conceived a child out of wedlock.

Of course, there can be no deterrence unless the public actually knows about the demise of poor ‘ole Mr. Kossoy.  That, in turn, requires publicity.  In that department, New Jersey officials did not disappoint.  Indeed, they wasted no time in disseminating as loud and clear a message as any.  As Mr. Hoffman, New Jersey’s acting Attorney General, said:

“Tax fraud of this nature is nothing short of stealing from the state and its honest taxpayers, who then are forced to pay higher taxes to cover the deficit.  Through cases such as this one, we are sending a loud and clear message that business owners who cheat the state and fail to remit taxes will be prosecuted as criminals.”

Also weighing in was Elie Honig, Director of the Division of Criminal Justice.  If there was still any doubt or uncertainty in the minds of New Jersey residents about how serious the attorney general will pursue tax evaders, it was erased by Mr. Honig’s stern and blunt warning: “Would-be tax cheats have a simple choice: pay now or pay later, when you may face time behind bars as well as civil penalties.  We are working closely with the Division of Taxation to detect and prosecute tax evaders.”

With statements like that we know that tax filing season has begun!

Notwithstanding the timing of many tax evasion stories, the message here is clear.  If you have cut corners in recent years and want to come into compliance, there is no better time than now to do so.  The IRS and most states operate on a first contact policy basis.  That means that the only sure way to avoid prosecution is by coming forward to correct an inaccurate tax return before it is selected for audit.  Much to the chagrin of the chronic procrastinator, a taxpayer’s desire to self-correct is not a defense if the past fraud is about to be discovered through a pending audit or by information disclosed to the state by a disgruntled former employee or spouse.