Trent Cotney, Partner, Adams and Reese LLP
If you are a business owner, you know how challenging it is to be profitable and successful. There are times when you may be tempted to cut corners. However, the story of two brothers who operated a roofing business serves as a sobering reminder that unethical shortcuts can lead to catastrophic consequences. The two Jacksonville roofing business operators recently pled guilty to conspiracy to commit wire and mail fraud, as well as conspiracy to commit tax fraud. Their actions, which involved evading payroll taxes and other liabilities, have destroyed their company and landed them in serious legal trouble. A report on the story can be found at www.floridaroof.com/jaxtaxfraud.
The issues of this case were investigated by the Internal Revenue Service (IRS) – Criminal Investigation, Homeland Security Investigations, Housing and Urban Development – Office of the Inspector General and the Florida Department of Financial Services.
The brothers operated a Jacksonville roofing business that changed names over the years. Although the business name varied, these entities followed the same operations and financial practices, which turned out to be highly illegal.
To manage its payroll, the company contracted with professional employer organizations (PEOs). These organizations prepared the payroll checks, filed payroll tax returns and forwarded tax payments to the government. However, the brothers withheld crucial information. They failed to report all the hours worked and wages paid to their employees. Instead, they issued employees separate checks directly from company accounts, bypassing payroll tax deductions on these payments. In addition, the brothers often issued lump-sum checks from the company checking account to crew leaders, who then processed the checks and paid their workers in cash.
This deceptive “split check” strategy allowed the company to avoid paying millions in payroll taxes to the IRS. According to the plea agreement, between 2015 and 2020, the companies issued approximately $23 million in direct payments to employees but made no tax deductions. The unpaid payroll taxes on these
payments totaled a staggering $4.3 million.
These dubious practices extended beyond payroll taxes. The brothers also underpaid workers’ compensation insurance premiums, which are calculated based on reported payroll amounts. Because they underreported their payroll to PEOs, the brothers avoided $2.78 million in workers’ compensation premiums. They even collected payouts on workers’ compensation claims without contributing the appropriate premiums, further escalating the fraud.
To make matters worse, both brothers underreported their personal income on tax filings. From 2014 to 2019, one brother evaded nearly $2.5 million in personal income taxes, while the other dodged about $264,000.
In the plea deals, they ultimately admitted just two crimes each so they could settle a more complex, 22-count indictment from last year that included the allegation that many of their workers were working and living in this country illegally, which might explain their practice of cash payments.
These fraudulent practices are serious and their penalties are severe. The brothers could face up to 25 years in federal prison. (Sentencing will occur later in 2025.) They have also been ordered to forfeit millions in ill-gotten gains and pay restitution for unpaid premiums on workers’ compensation insurance, a few workers’ compensation claims and lost payroll taxes. One brother will pay about $11.6 million in total, while the other’s liability exceeds $1.6 million.
In addition, one of the owners was involved in an earlier court battle over an uncollected $2.2 million penalty handed down by the OSHA. In May, with a judge’s approval, a liquidating agent was hired to manage the sales of the family homes to collect on the fine.
As you manage your business, it is critical that you avoid the crimes that the brothers committed. Consider these guidelines.
1. Be transparent: Ensure you are accurate in reporting payroll and taxes. Breaking the law to save money may provide short-term gains but might result in long-term problems.
2. Understand your legal obligations: Familiarize yourself with tax laws, workers’ compensation requirements and other regulations. Not knowing is not a defense.
3. Consider immigration and labor laws: If your workers are not in the United States legally and you are finding ways to pay them in cash, you might be playing with fire. We all know how difficult it is to get skilled workers these days, but the immigration issue is bound to become more challenging.
4. Practice integrity: Ethical business practices build trust with clients, employees and regulators. Meanwhile, fraudulent practices can ruin reputations and livelihoods.
5. Understand the ripple effect: Beyond legal penalties, committing fraud can damage your relationships with customers, employees and vendors. The fallout can devastate a business for years, if not shut it down permanently.
The demise of this roofing business is a powerful example of unethical decision-making. While savvy ownership often involves taking calculated risks, breaking the law should never be an option. As we can see from this case, cutting corners to cut costs may not be worth it in the end.
The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation. Trent Cotney is a Partner and Construction Team
Leader at the law firm of Adams and Reese, LLP and FRSA General Counsel. For more information, you can contact him at trent.cotney@arlaw.com or by phone at
813-227-5501.
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