The tax fraud charges brought against the Trump Organization and its CFO, Allan Weisselberg, may seem to some a political vendetta waged by the New York district attorney against the former president. Donald Trump has called the indictment a “witch hunt” and his son Don Jr., said the “case is straight from a banana republic.”
However, the indictment is a fairly straightforward tax evasion case—$1.7 million unreported over 15 years—alleged compensation to Weisselberg, in some cases recorded as business expenses by the company. The indictment says Trump and Weisselberg kept the payments “off the books” as a way for Weisselberg to “receive substantial portions of income through indirect or disguised means, with compensation that was unreported or misreported by Trump.”
The charges involve using company funds to pay for two Mercedes cars—one for Weisselberg and one for his wife, a New York City apartment, which the Feds claim was Weisselberg’s personal residence, and typical expenses of maintaining the apartment—utilities, telephone and cable expenses. The government says these expenses should have been taxable income, instead, the government said Trump reduced the amount of taxable compensation paid to Weisselberg, by approximately $100,000 per year.
Trump also made tuition payments for one of Weisselberg’s family members and the payment was noted internally as a reduction of Weisselberg’s overall compensation for that year, but not included as compensation in a W2 or 1099.
What does Trump and Weisselberg’s tax problems have to do with business owners and their executives?
While the noise is political, a good accountant will advise their clients that the IRS is always on the lookout for personal expenses charged to the business. Keith Foster, a CPA and partner with BKD said the IRS attacks these items in audits all the time.
“They will request transaction-level detail and ask for support for items that appear to be personal such as travel, dry cleaning, rents for residential properties, claims for 100% business use of autos or planes, and if there is no support they can be disallowed,” said Foster.
Foster also said he finds these cases more common in smaller businesses than in larger, more structured businesses. “Owners often use the company as their piggy bank and either knowingly—to generate a business deduction for personal expenses—or unknowingly, due to a lack of knowledge about the rules or poor record keeping, fail to pay the company back or pick up the expenses as wages or guaranteed payments,” said Foster.
For typical audit items such as the personal use of cars, Kaz Unalan, a CPA with GBQ Partners, realizes smaller business owners will continue to pay their car expenses from the company checkbook, and are loathe to keep detailed mileage records. Instead, he urges them to at least automatically add a fringe benefit to their W-2 for, say, 40-50% of the costs. That way, in case of an audit, the taxpayer can argue with the IRS over the amount of personal use, not the failure to report it.
Minneapolis tax attorney Dennis Monroe said he’s represented business owners who ran afoul of the law by using company funds to pay their credit card bills, but didn’t break them down as to what was a personal or business expense. While there is no law against paying personal expenses with company funds, it is against the law to deduct them. “I advised my client to pay the tax and penalties on the entire credit card amount, so the IRS wouldn’t pursue criminal charges,” said Monroe.
Cases have been brought by the IRS against business owners for more than just running personal expenses through the business. A typical fraud case involves the keeping of two sets of books and skimming cash from reported sales receipts.
Other cases involve paying employees in cash, thus avoiding employment taxes. Other cases involve accepting and not reporting cash bribes from suppliers, or having construction work performed on their residence and either having it billed to the company or buried in a store construction bid. All of these items are subject to greater scrutiny by the IRS and there is a potential for incarceration.
An especially egregious case took place in Wisconsin in 2015 when a multi-unit restaurant owner, his wife, son and son-in-law, pleaded guilty to skimming more than $3 million in restaurant receipts from their restaurants, expensing personal expenses and paying employees in cash to avoid employment taxes. All but the wife went to jail.
In another case, a Chicago restaurant franchisee pleaded guilty this year to under reporting cash sales on a number of federal corporate tax returns, as well as on state sales and income tax returns in Illinois. In one of the corporations he filed a return for, he reported sales of $842,572 when, in fact, the actual sales were $1,880,677. The business owner received a 15-month jail sentence and will be on probation for five years. He must pay the back taxes plus a hefty fine.
There are various congressional proposals to increase IRS funding to increase the audit rate for S corporation and partnership tax filings, currently less than 1% of all such returns. Maybe the IRS will look harder, maybe they won’t. Nevertheless, it will be interesting to see what happens in the Trump case.