William J. Edwards, United States Attorney for the Northern District of Ohio, announced today that Stephan Karchut was sentenced to four months imprisonment, four months of home detention with electric monitoring, and three years of supervised release following incarceration for attempting to evade his 2004 income taxes. The sentence was imposed by United States District Judge James S. Gwin, who also ordered Karchut to pay restitution to the Internal Revenue Service (IRS) of $44,901 of taxes owed for the years 2003 and 2004 and to cooperate with the IRS in determining additional income taxes, penalties, and interest that he may owe for the years 2002 through 2004. Karchut previously pleaded guilty to the charge, which involved Karchut’s efforts to conceal income he earned as sole operator of a business known as PC Surveillance, located in Cortland, Ohio, where he formerly resided. According to court records, Karchut currently resides in Kalispell, Montana.

Karchut entered a written plea agreement in which he described his offense conduct, as follows. Beginning in 2002, Karchut followed erroneous advice of a person who held himself out as a tax professional (referred to by his initials, “DR”) to conceal his income and tax liabilities. Karchut failed to file income tax returns for 2002 - 2004, on DR’s false advice that under Section 861 of the Internal Revenue Code income is not reportable unless it is received from foreign source – the so-called “861 argument.” Karchut also structured the ownership of PC Surveillance as a supposed limited liability company in a manner that DR designed to conceal Karchut’s control of the business, using various other entities and a purported Individual Retirement Account as nominal owners of the business.

As of at least mid-2005, Karchut questioned the validity of the 861 argument and realized that the nominal ownership arrangement of PC Surveillance.net LLC was a device to conceal his true ownership and control over the business. He nevertheless continued to present that argument and to conceal his ownership and control over the business in his communications with the IRS in accordance with advice he continued to receive from DR. In particular, for 2004, Karchut attempted to evade income taxes of at least $34,075, owing on unreported income of at least $161,849, by failing to file a personal income tax return; by filing a false business tax return for PC Surveillance, LLC, showing himself as having only a 1% ownership interest; and by sending correspondence to an IRS agent claiming he could not file a personal return until the IRS showed him what Tax Code provision applied to income earned in the United States and by falsely claiming that he only worked “now and then” for PC Surveillance.

The government’s case was prosecuted by Assistant United States Attorney John M. Siegel, following an investigation conducted by the Internal Revenue Service, Criminal Investigation, Youngstown, Ohio.

Under existing tax law, a person convicted of a criminal tax offense, in addition to whatever sentence is imposed, is also required to pay the tax determined to be due as well as interest and civil penalties that may be assessed.