Recently CNN reported on a raid of Gladys Knight’s Signature Chicken & Waffles restaurant by Georgia’s Department of Revenue. Shanga Hankerson, Knight’s son, was accused of stealing roughly $650,000 by withholding sales taxes owed to the state. This high-profile case should serve as a cautionary tale to small businesses everywhere: The risk of not complying with sales tax just isn’t worth it.
But what exactly is sales tax fraud and what penalties might a guilty verdict mean for Hankerson?
Sales Tax Fraud: Explained
Understanding sales tax fraud is pretty simple. Basically, this type of criminal offense occurs when either a business fails to collect sales taxes from customers, willfully or negligently doesn’t forward sales taxes to the state, or reports inaccurate sales tax figures.
4 Big Ways Businesses Get Caught
While many businesses believe that sales tax fraud can easily go undetected (usually by collecting cash payments or not issuing receipts), this is not exactly the case. First, the state monitors your income—and yes, that includes monitoring for sales tax evasion. Second, states depend on sales taxes to fund a myriad of programs, meaning they particularly monitor cash-prone businesses (like grocery stores and restaurants) closely.
See some of the top ways businesses are caught avoiding sales taxes.
- Questionable tax filings. If the IRS or the state notice discrepancies in your filed tax return, they will usually begin investigating. That means looking at your business and personal accounting records, including spending, to see if everything adds up correctly.
- Reporting from an outside source. Each state has a toll-free number that customers and employees can call to report sales tax evasion. This means that, each time you request cash for a “no-tax” price, you run the risk of being reported.
- An audit. Businesses or entrepreneurs operating in industries with a large number of cash transactions may be audited—whether or not there are issues with their tax filings. This is done as a way of discouraging sales tax avoidance and detecting fraudsters who may have gone unnoticed.
- Tax preparers with a number of large returns. These tax preparers usually promise big tax returns and accomplish this by underreporting income. This may not necessarily be the fault of a business, but the state and IRS are not known for their compassion toward filing mistakes.
Penalties of Sales Tax Evasion
No matter the dollar amount of unreported income, business owners should expect large fines (from 25% to 75% in civil penalties). If the sales tax fraud is found to be deliberate, violators can even face jail time.
States depend on sales tax revenue to provide a wide array of civil projects, including infrastructure, crime prevention, public programs and education. By avoiding sales taxes, you are not only putting yourself and your business at risk, but you are also negatively affecting your community. And if you doubt you’ll be caught, just ask recent tax evaders Wyly and Zukerman about it.
Have you found yourself at risk for sales tax evasion? Or maybe you haven’t filed income, sales tax or payroll tax returns? Let Direct Tax Relief get you back on track. Visit us on the web or contact us 24/7 at 1-877-505-4829.
Want to read more from our blog? Check out these recent topics.