by Brian Mahany
I received an email today saying that lately Due Diligence has been a bit boring. Taxes can be a bit boring and there is little humor in fraud cases, especially if you are a victim. But tales of a murder plot in southern California might just get some readers to perk up.
According to press reports, Steven Martinez is a tax preparer in Ramona, California. Previously he worked as an IRS agent. Somewhere along the way, Martinez lost his way. Prosecutors said he stole $11 million from his clients. The method of his theft has some important lessons for everyone using a payroll service or tax preparer to collect and pay over taxes.
Martinez apparently prepared returns showing more tax due than was actually for that taxpayer. His business clients were then encouraged to deposit the tax monies into Martinez’ account so that he could pay the taxes with each return. Actually, he was pocketing the money and filing fraudulent returns with the IRS showing little money due.
This payroll fraud scam could be devastating for small business clients. Not only did their original tax payment never make it to the IRS, the taxpayer still owes the tax and must pay it a second time.
There are several takeaways to the first par of this story. First, if you use a payroll processor, be leery of making tax deposits to the preparer instead of the government. Writing a check only takes a minute.
Next, remember that you can set up your power of attorney with the IRS such that you receive duplicate copies of all correspondence. This allows you to compare what the preparer or payroll processor is telling you to what is actually being filed with the IRS. It also gives you an early heads up if payments are not being made or returns delinquent.
Finally, make sure the preparer is bonded and insured. (Most CPAs are insured, many “mom & pop” preparers are not.) Just because the preparer says they have insurance doesn’t mean they really do. Unfortunately the only way to protect yourself is do some homework and digging. We are aware of a company in northern New Jersey that created a fake bonding company simply so it could issue a worthless bond to its customers. If criminals are brazen enough to steal payroll taxes, they will not hesitate to prepare phony bond paperwork.
I started this post by promising something interesting. After Martinez’ arrest, prosecutors say he hired a hit man to kill four witnesses scheduled to testify against him in the tax case. He reportedly offered $100,000 to kill the four. Considering he stole $11 million from clients, coming up with $100,000 to kill witnesses sounds like a bargain.
Thankfully, the alleged “hit man” cooperated with the FBI. Martinez was convicted of using interstate commerce to commit murder-for-hire and witness tampering. He faces the rest of his life behind bars when sentenced later this year.
And who says tax is boring?
[Ed Note: Mahany & Ertl is a full service boutique tax controversy and fraud law firm. Our tax lawyers have helped many individuals and small businesses with a wide variety of tax problems. If you think you may need our help, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are protected by the attorney client privilege and kept in strict confidence even if we are not hired by you.]
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