Baltimore, Maryland - U.S. District Judge J. Frederick Motz sentenced Salvatore Petti, age 76, of Ellicott City, Maryland today to 15 months in prison followed by three years of supervised release for evading payment of taxes on income earned from a Social Security Administration (SSA) employee association and embezzling funds from the association. Judge Motz also entered an order that Petti: forfeit approximately $83,000 in proceeds held in bank accounts, and from the sale of a personal seat license for the Baltimore Ravens and three Marriott timeshares; and pay restitution totaling $570,493 - $299,724 to the employee association for the funds he embezzled; and $270,769 to the IRS for unpaid taxes from 1998 through 2009.
The sentence was announced by United States Attorney for the District of Maryland Rod J. Rosenstein and Special Agent in Charge Thomas J. Kelly of the Internal Revenue Service - Criminal Investigation, Washington, D.C. Field Office.
“There are serious consequences for this type of criminal conduct,” said Thomas J. Kelly, Special Agent in Charge, IRS Criminal Investigation, Washington, D.C. Field Office. “Mr. Petti’s act of intentionally under-reporting income on his federal tax returns is unlawful. Today’s sentence demonstrates the collaborative effort between IRS Criminal Investigation and its federal law enforcement partners in bringing individuals to justice who choose to engage in any financial scheme to defraud the American public.” Petti worked for the SSA for more than 40 years, retiring in 1995 as a District Director. He also served as the treasurer for the Employees Activities Association (EAA) of the SSA, located in Woodlawn, Maryland. The EAA provided social, recreational, welfare, health and athletic activities for its members, the employees of the SSA. EAA was comprised of multiple entities, including two for-profit and three non-profit entities. Between 2005 and 2008, Petti earned an annual salary from the EAA of approximately $60,000.
According to his plea, in 2009, the SSA Office of Inspector General audited the EAA and discovered that Petti had not reported any EAA income to the IRS between 2006 and 2008. Indeed, by February 2009, Petti had not reported to the IRS any EAA income from at least 1998 through 2009. Petti was also able to evade paying taxes on his salary from EAA by classifying himself as an independent contractor, when he in fact knew that he should have been classified as an employee. Unlike other employees of EAA who had income, Social Security, and Medicare taxes withheld from their paychecks, Petti did not. Even though he classified himself as an independent contractor, Petti did not issue himself a Form 1099, he did not send the IRS a Form 1099 showing the income he received, and he did not report his EAA income to the IRS when he filed his false tax returns.
The auditors told Petti in February 2010 that Petti’s EAA income would be reported to the IRS. The next month, Petti filed amended tax returns for the years 2006 through 2009, reporting his EAA salary. Petti, however, included false expenses for purported “office expenses,” “supplies,” “travel” and “utilities.”
Further investigation revealed that Petti was embezzling substantial funds from the EAA. Between 2005 and 2009, in addition to the $60,000 salary he was entitled to receive, Petti issued unauthorized checks to himself, which he falsely classified as “administrative expenses” and “general expenses,” in order to conceal his theft from EAA. Additionally, because Petti knew that the outside accounting firm audited the non-profit entities but not the for-profit entities, Petti issued the checks to himself from the for-profit entities’ bank accounts in order to hide the unauthorized income from the accounting firm. By doing so, Petti was able to hide approximately $416,000 of unauthorized payments to himself between 2005 and 2009. Petti did not report the $416,134 of additional, unauthorized income on either his original tax returns for years 2005 through 2009, nor on his amended tax returns in 2006 through 2009.
Today’s announcement is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations. Over the past three fiscal years, the Justice Department has filed more than 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,700 mortgage fraud defendants. For more information on the task force, visit www.stopfraud.gov.
United States Attorney Rod J. Rosenstein thanked the SSA - OIG for its assistance in the case. Mr. Rosenstein commended the IRS Criminal Investigation for its work in the investigation and praised Assistant U.S. Attorney David I. Sharfstein, who prosecuted the case.