THIRD CONSPIRATOR PLEADS GUILTY IN SCHEME TO DEFRAUD THE INTERNAL REVENUE SERVICE
WEDNESDAY, MARCH 28, 2012
Public Affairs Officer
CINCINNATI, OHIO – James Jackson, 68, of Cincinnati, Ohio, pleaded guilty to one count of conspiracy with two others to defraud the Internal Revenue Service (IRS) by evading the assessment and collection of personal income taxes.
Carter M. Stewart, United States Attorney for the Southern District of Ohio, along with Darryl Williams, Special Agent in Charge, Internal Revenue Service (IRS), Criminal Investigation, Cincinnati Field Office, and Dugan T. Wong, Assistant Inspector in Charge, U.S. Postal Inspection Service, announced the guilty plea entered today before Senior U.S. District Judge Herman J. Weber.
According to court documents, during 2005 John Grinstead and Larry Lough operated a research and development company in the Cincinnati, Ohio area known as Tri E Technologies (TET). TET specialized in the removal of lead from glass and employed nine or more employees each year. Grinstead and Lough received wage income from TET in 2005, and Jackson provided accounting services to Grinstead and Lough.
Jackson conspired with Grinstead and Lough to evade the assessment and collection of personal income taxes by willfully filing false federal income tax returns with the IRS. Jackson knew that Grinstead and Lough had received more gross income than they reported to the IRS. The three acted together to falsify the payroll records of TET to show payments to Grinstead and Lough as loans, when in fact, the payments were salaries which should have been reported as income.
For tax year 2005, Jackson prepared and filed 2005 income tax returns with the IRS for Grinstead and Lough that failed to report income they received from TET in the amount of $102,012.29 and $109,118.13 in income, respectively. As a result, Grinstead evaded $22,325.31 and Lough evaded $29,927.78 in personal income taxes due on the income earned.
As a result of Jackson’s participation with Grinstead and Lough in the charged conspiracy, there was a total tax loss to the IRS of $52,253.09.
Jackson was released on bond. He faces a maximum prison sentence of 5 years and a fine of up to $250,000 and is scheduled for sentencing on July 10, 2012.
On February 14, 2012 and February 15, 2012, respectively, Grinstead, 54, of Cincinnati, Ohio, and Lough, 58, of Cincinnati, Ohio, each pleaded guilty to one count of income tax evasion and one count of conspiracy to defraud the IRS relative to employment taxes, each count being punishable by up to 5 years in prison and a fine of $250,000, plus one count of conspiracy to commit mail and wire fraud, punishable by up to 20 years in prison and a fine of $250,000.
Grinstead and Lough each admitted they engaged in a separate scheme to defraud investors in TET. In 2003, the two partners solicited $2,309,000 from 32 investors to help start up and fund the research and development of TET products.
As employers, Grinstead and Lough were required to file Forms 941, Quarterly Employment Tax Forms, and to collect and pay over federal employment taxes on their employees. Additionally, Grinstead and Lough were required to file Forms 1065, Federal Partnership Tax Returns, to report the true amount of income and/or losses from the partnership’s business activities, and to file correct individual income tax returns.
On behalf of the investors, Grinstead and Lough owed a duty to investors to report the true financial condition of the company to the investors, and to inform each investor/partner of their share of TET income or losses at the end of each year by providing accurate Forms K-1 to each investor.
Instead, Grinstead and Lough deliberately defrauded investors by making false representations concerning the true financial condition of TET. Grinstead and Lough kept track of the payroll tax liabilities, including the amount of taxes withheld by the company from their employees in the company’s financial records. Using false entries in the company’s financial records, prepared by Jackson, Grinstead and Lough concealed the payroll tax liabilities by reclassifying the wage payments made and taxes collected on the company records from expenses and liabilities to assets.
Grinstead and Lough further conspired with Jackson to prepare false partnership tax returns by failing to deduct the wages paid to themselves and their employees and by listing the false asset figures on the partnerships tax returns. By doing so, Grinstead and Lough were able to conceal $757,754.87 in additional expenses from the investors.
They used the U.S. mail services to send the Forms K-1 to investors, which falsely reported to investors that the financial condition of TET was profitable. In fact, the company was failing, it ultimately became insolvent, and the investors’ money was gone.
In addition, Grinstead and Lough conspired with Jackson to evade the assessment and collection of employment and personal income taxes by filing false federal employer’s tax forms, partnership tax returns, and individual income tax returns for Grinstead and Lough.
Grinstead and Lough knew their employees should have had income, Social Security and Medicare taxes withheld from their wages, and those employment taxes should have been paid over to the IRS. Grinstead and Lough issued checks to their employees and themselves, and withheld the employee’s share of the payroll taxes, but failed to remit the employment taxes collected along with the appropriate employer’s matching contributions to the IRS.
In an effort to circumvent the payroll tax system, Grinstead and Lough caused to be filed quarterly employment tax returns with the IRS indicating they paid employees $39,273.32 in wages in 2005 and $85,656 in 2006 ($124,929.32 in total), when in fact they paid $517,709.28 and $364,974.91 ($882,684.19 in total) in 2005 and 2006, respectively.
In addition, through the false accounting records and the false partnership returns, Grinstead and Lough evaded the assessment, reporting, and payment of taxes, including those associated with Medicare, Social Security, and personal income taxes, which they had an obligation as employers to pay.
The total tax loss in these cases to the IRS was $167,501.39.
As part of their plea agreements, Grinstead and Lough agreed to forfeit all patents, technology and equipment purchased with investor monies. In addition, they agreed to cooperate fully with the IRS in order to determine and calculate all taxes, interest, and penalties due and owing, and to pay all taxes, interest, and penalties due and owing.
“Individuals who engage in fraud schemes in order to secure money from investors under false pretenses are committing serious crimes. Perpetrators of fraud schemes such as this will be prosecuted, with a clear message that such offenders act at their own peril,” said U.S. Attorney Carter M. Stewart.
"Business owners have a responsibility to withhold income taxes for their employees and then remit those taxes to the Internal Revenue Service," said Darryl Williams, Special Agent in Charge, IRS Criminal Investigation, Cincinnati Field Office. "The failure to pay over employment taxes is a very serious offense and provides business owners with an unfair competitive business advantage."Stewart commended the cooperative investigation by agents of IRS-Criminal Investigation and Postal Inspection Service, and Senior Litigation Counsel Anne L. Porter, who is prosecuting