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19 April 2017

Keeping Two Sets of Books Could Lead to Prison

Keeping Two Sets of Books Could Lead to Prison

Most businesses normally keep only one set of books, usually maintained to present financial statements to stakeholders (shareholders, financial institutions or government regulators such as the IRS and SEC). Their CPAs, whether internal or from an outside firm make “tax adjustments” to convert “book income” to “taxable income” and then complete the appropriate forms notifying the IRS of the differences. However, if a business has two sets of books, the IRS becomes very skeptical very quickly.

Attorney Robert Wood points out several cases that ended badly for business owners. In one case, a Nevada liquor store owner kept two sets of books: one that accurately reflected the store’s sales and a second set that fraudulently omitted nearly $4 million in cash receipts, which is the set he and his business partner shared with their accountant. He was sentenced to 41 months in prison and three years of supervised release and ordered to pay restitution for conspiring to defraud the United States and tax evasion.

The stakes are higher for franchise owners. The owner of Detroit-based Happy’s Pizza, who was found to have kept double books, was charged with three counts of filing false returns, 28 counts of aiding and assisting the filing of false returns franchises, and one count of engaging in a corrupt endeavor to obstruct and impede the IRS. He was sentenced to 50 months in prison and three years of supervised release, and was ordered to pay $2.5 million in restitution to the IRS.

How does the IRS find out about the double books? If the discrepancies are large enough (as in the cases cited above), they’ll go to great lengths to uncover the wrongdoing. Woods uses the case of a father and son who ran two Oregon strip clubs as an example. Their underreporting of cash obtained through cover charges, stage fees and fines was so substantial, the IRS became curious. They sent in an undercover IRS agent posing as a buyer for the clubs, who then got the owners to reveal the second set of books and explain how their scam worked as part of their sales pitch.

The practice of keeping a second set of books is never advisable. Keeping secrets from your tax preparer will most certainly have unimaginable consequences. Contact us if you have any questions or concerns.

Image Copyright: stocksnapper / 123RF Stock Photo

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