LAST OF THREE CONSPIRATORS SENTENCED IN SCHEME TO DEFRAUD THE INTERNAL REVENUE SERVICE
TUESDAY, SEPTEMBER 18, 2012
Public Affairs Officer
CINCINNATI, OHIO – Larry Lough, 58, of West Chester, Ohio, was sentenced to 24 months of imprisonment, three years of supervised release, and ordered to pay $757,751.13 in restitution to defrauded investors on charges of conspiring to commit mail and wire fraud, $115,248.60 in restitution to the IRS for conspiring to commit employment tax fraud and income tax evasion, and $29,927.78 in restitution to the IRS for income tax evasion. Lough previously pleaded guilty to these offenses on February 15, 2012.
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, Inspector in Charge, U.S. Postal Inspection Service, announced the sentence handed down by Senior U.S. District Judge Herman J. Weber.
On August 2, 2012, James Jackson, 68, of Cincinnati, was sentenced by Senior U.S. District Judge Herman J. Weber to serve one day of incarceration, two years of supervised release, of which 12 months were to be served in home confinement, and was ordered to pay a $3,000 fine. In addition, Jackson was ordered to not advise or prepare income tax returns. Jackson previously pleaded guilty on March 28, 2012 to one count of conspiracy defraud the IRS by evading the assessment and collection of personal income taxes.
According to court documents, during 2005 John Grinstead (deceased) 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. Lough received wage income from TET in 2005, and Jackson provided accounting services to Lough.
Jackson conspired with 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 Lough had received more gross income than they reported to the IRS. They acted together to falsify the payroll records of TET to show payments to 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 Lough that failed to report income they received from TET in the amount of $109,118.13 in income. As a result, Lough evaded $29,927.78 in personal income taxes due on the income earned.
As a result of Jackson’s participation with Lough in the charged conspiracy, there was a total tax loss to the IRS of $52,253.09.
Lough admitted he engaged in a separate scheme to defraud investors in TET. In 2003, he, along with Grinstead (deceased) solicited $2,309,000 from 32 investors to help start up and fund the research and development of TET products.
As an employer, Lough was required to file Forms 941, Quarterly Employment Tax Forms, and to collect and pay over federal employment taxes on the employees. Additionally, Lough was 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, 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, Lough deliberately defrauded investors by making false representations concerning the true financial condition of TET. 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, 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.
Lough further conspired with Jackson to prepare false partnership tax returns by failing to deduct the wages paid to himself and the employees and by listing the false asset figures on the partnerships tax returns. By doing so, Lough was able to conceal $757,754.87 in additional expenses from the investors.
The U.S. mail services were used 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, 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 Lough.
Lough knew the 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. Lough issued checks to the employees and himself, 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, Lough caused to be filed quarterly employment tax returns with the IRS indicating the employees were paid $39,273.32 in wages in 2005 and $85,656 in 2006 ($124,929.32 in total), when in fact they were actually 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, Lough evaded the assessment, reporting, and payment of taxes, including those associated with Medicare, Social Security, and personal income taxes, which he had an obligation as employers to pay.
The total tax loss in these cases to the IRS was $167,501.39.
As part of his plea agreement, Lough agreed to forfeit all patents, technology and equipment purchased with investor monies.
“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."
The criminal investigation into the fraud and tax crimes began with information uncovered by the U.S. Environmental Protection Agency.
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 these cases.