November 03, 2004

Using Payment Systems to avoid tax

Here is an innovative payment system that the IRS (United States tax department) claimed (successfully) was employed to avoid tax.

"President of Construction Company Sentenced

"On June 24, 2004, in Billings, Montana, Ron Omo, president of Big O Construction, Inc., was sentenced to 2 years probation and ordered to pay restitution of $21,224. In addition, Omo was fined $10,000 and the Big O Corporation was fined $40,000. Omo pleaded guilty on February 5, 2004, to charges of disclosing false information on IRS Form 1096, Annual Summary of Information Returns, by not including IRS Form 1099, Miscellaneous Income, evidencing income received by persons driving vehicles for the benefit of Omo and Big O Construction.

"Omo established a payment system for 36 truck drivers employed by Big O Construction, whereby the drivers submitted "driving slips" to bill for driving services and other miscellaneous work provided to the company. Omo and Big O Construction paid the drivers based upon the driving slips instead of time cards. Under this system, no benefits, unemployment insurance or other employment taxes were paid in connection with the driving slip payments. No year end summaries "Form 1099's" were issued to the 36 drivers with respect to the work accounted for by "driving slips." By not issuing year end summaries, Omo and Big O Construction assisted the drivers in their non-reporting of income when the drivers filed their individual tax returns. The practice of paying drivers through the use of drivers slips, failing to report the payments to the IRS, and the drivers failing to include the payments on their individual income tax returns, resulted in an aggregate federal income tax loss totaling $21,224."

This notion that independent payment systems are useful for avoiding tax has always dogged the small payment systems operators. It's a sort of "you're different so you must be evil" slander. In my experience it is pretty rare that a) any operator thinks in these terms and b) they have any significant clientele that use payment systems to avoid tax.

The reason for this is easy to explain: most payment systems out there provide quite clear trails to "follow the money." They have to do this; if they don't, they tend to lose money through user error, support failures, system bugs and theft. Payment systems have to first and foremost provide safe money.

Of course, that doesn't mean that a customer can't use the payment system as an adjunct to some tax avoiding scheme (or is it tax evasion? I can never remember which is which). Sure, that goes on in a few cases, but it's fundamentally nothing different to using the banks, or cash, or any other form. On the plus side it is often easier to open accounts in net payment systems, but on the minus side, the evidence is a lot clearer.

Then there are of course the payment systems that offer untraceable cash (sometimes called anonymous cash, but this is incorrect as all these systems have historically used identified accounts). Untraceable cash systems are unsustainable and dangerous places to leave your money; simply because when something goes wrong, you can't "follow the money" and that generally means that at some point, something will go wrong, and the system will collapse. Payment systems that can't keep their money safe don't operate for long.

This then means that these systems can only be used for washes - quick ins and outs. This is often hard to hide, and it puts further strain on the system. For example, I came across a regular wash through a payment system where every month the money would come in to the system, and the same day, often the same hour, money would go out again. Because the wires coming in and going out went through the same bank, this would be easy to spot, and you'd only have to ask...

Posted by iang at November 3, 2004 06:38 AM | TrackBack