Richard Joseph Salon Spa Owners Sentenced To Prison For Tax Fraud Conspiracy

BIRMINGHAM -- A federal judge today sentenced the owners and operators of Richard Joseph SalonSpas in the Birmingham area to three years in prison for conspiring to avoid paying more than $1 million in employment taxes to the IRS, announced U.S. Attorney Joyce White Vance and Internal Revenue Service Criminal Investigation Special Agent in Charge Veronica Hyman-Pillot.

U.S. District Judge Abdul K. Kallon sentenced both RICHARD JOSEPH SMITH, 54, and TIMOTHY EUELL BROWN, 55, to prison for the tax fraud conspiracy in which they failed to pay employment taxes to the IRS that they withheld from employees' wages over eight years from 2006 to 2013. Smith and Brown pleaded guilty to the charge in May, and acknowledged that they also skimmed money from the salons for personal use. Their prison reporting dates have not been set.

The judge ordered the men to pay $1.4 million in restitution to the IRS, which they had agreed to as part of their plea agreements with the government. The $1.4 million represents only the payroll taxes withheld from employees, not the employer portion of payroll taxes, which also went unpaid.

The government is seeking an order restraining the defendants' assets and directing the proceeds from the sale of personal property be applied to the restitution.

The men's Hoover home was lavishly furnished with antiques, art, fine china and chandeliers. The house is now for sale and most of the furnishings have been moved into storage. The IRS has a tax lien on the house for unpaid employment taxes, predating the current prosecution. Any proceeds from the home sale would go, first, to satisfy the tax lien.

"These defendants lived a high-end lifestyle of luxury at the expense of their employees and the nation's tax-paying citizens," Vance said. "They deducted more than $1 million in payroll taxes from their workers' wages, but they kept the money for themselves instead of lawfully paying the money to the IRS, leaving more than 100 employees uncertain about their future benefits and security," she said. "Prosecutions like this protect hard-working Americans."

“Employment tax fraud has a huge impact on our nation’s tax system. It results in loss of revenue to the government and affects the livelihood of the victims," Hyman-Pillot said. “Richard Smith and Tim Brown abused the trust of many people and must be held accountable for their corrupt actions. IRS Criminal Investigation will continue to enforce our nation’s tax laws and investigate individuals who choose to disregard those laws for personal benefit,” she said.

Richard Joseph SalonSpa has been a prominent business for more than two decades in the Birmingham area, with Smith as master stylist and Brown as business manager handling finances, including payroll, according to government documents.

By neither paying over to the IRS the taxes they withheld from their employees, nor reporting and paying taxes on their individual incomes, Brown and Smith lived an extravagant lifestyle, according to the government's Aug. 27 sentencing memorandum.

Brown bought the couple's home in the Preserve neighborhood in Hoover in 2005 for $891,000, and they have maintained the $5,245 monthly mortgage payment, according to the memorandum. In 2008 and 2009, they paid more than $80,000 to add a swimming pool and outdoor fireplace. The two men also employed as many as four full-time staff to perform housework, lawn maintenance, elder care for a live-in relative, and pet care for their 12 dogs, according to the sentencing memorandum.

The defendants' tax fraud proceeded as follows, according to government documents:

Beginning in 1991, a company called Smith, Hobart & Brown operated Richard Joseph SalonSpa in Mountain Brook, and Brown was the sole owner and registered agent of SHB. SHB operated the spa from 1991 to July 2006. SHB owed more than $300,000 in employment taxes to the IRS by the third quarter of 2006. The IRS began notifying Brown of payroll tax deficits and requesting payment in 2004. When a revenue officer met with Brown and his accountant in 2007, Brown said he had closed his salon in July 2006 and no longer worked at Richard Joseph SalonSpa.

While the daily operation and management of Richard Joseph SalonSpa never changed, Smith incorporated a new company, RJSS Inc., in June 2006. RJSS took over operation of Richard Joseph SalonSpa in Mountain Brook, and Smith and Brown opened a business checking account together for RJSS, listing both men as its owners.

Brown misrepresented to the IRS that he closed his salon business in 2006 and no longer worked at Richard Joseph Salon, the government said in its sentencing memorandum. Rather than closing the salon, he transferred its ownership to Smith and "carried forward with business as usual."

In August 2008, Smith incorporated another business, Richard Joseph Redmont Group Inc., and he and Brown together opened a business checking account for it. In July 2009, Smith and Brown opened a Richard Joseph Salon on U.S. 280 in Inverness, and operated it through the Redmont Group.

Between 2006 and 2013, Smith and Brown withheld the $1.4 million from employees of RJSS and Redmont group and failed to pay it over to the IRS in employment taxes.

IRS Criminal Investigation Division investigated the case, which Assistant U.S. Attorney Robin Beardsley Mark prosecuted.