If you made it all the way through part 2, you know how my first job sucked the life out of me. This, the third and final part of the series, explains how the company affected other people.
You know all that money that gets withheld from your check every payday? Well, your employer is required to send that money to the federal and state government on a very strict schedule. So let’s say you get paid on Friday. By Tuesday or Wednesday of the following week, all of the employees’ tax withholding has to be deposited (don’t quote me on these timeframes—it’s been 15 years, and I’m not as up-to-date on the laws as I used to be) with the government.
As my employer’s business expanded, it offered a tax filing service for the payroll clients. When clients purchased the tax filing service, the company would debit their bank accounts on the check date for the total tax amount. Then my employers got the “float” (interest) on that money between the check date and the date it had to be deposited. Great arrangement, right?
Well, in reality there were a couple of problems with it. One was that the owners didn’t set up a separate bank account for the tax monies–they just deposited them into the operating account. And the other problem was that small start-up companies often have trouble keeping up with expenses. There were legitimate business expenses of course, but there were also things like the Chevy Blazer that their teenagers drove, the owners’ trip to New York so the husband could run in the marathon, and their vacation on a Windjammer Barefoot Cruise (meanwhile, we employees were paid dirt).
Often, they would debit Company B’s account on a Friday and use the funds to pay Company A’s taxes on Wednesday. Then on Thursday they’d debit Company C’s account and use that money to pay Company B’s taxes. And so on and so on. This tactic worked pretty well at first. But then they started to land bigger and bigger clients, with bigger and bigger tax liabilities. Pretty soon, Company C’s debit amount didn’t cover all of Company B’s payroll taxes, and the snowball began rolling down the hill. I’m not sure how long it went on, but I believe it started before I left the company in March of 1994.
As a result of this “business practice,” there were some companies whose taxes were being paid late (tack on some interest and penalties), and later, some companies whose taxes didn’t get paid at all. As you can imagine, the clients weren’t too happy when they started getting notices from the IRS. It took a while, but eventually the IRS began to piece the puzzle together–about 100 companies with tax deposit problems, and the common denominator was the payroll company that they used.
Everything came crashing down in the fall of 1995. The company was looking for investors and trying to avoid bankruptcy when they were raided by the federal government. The whole thing was captured by the local TV news crews. As my roommate (who had also worked there) and I watched the 10:00 news, we saw images of men removing file boxes that bore our handwriting. Our stunned former co-workers appeared in the background. It was surreal.
In all, approximately 100 clients were affected to the tune of $5.7 million, and they were still on the hook to pay the IRS. So in effect, they paid double their taxes (once to my former employer and again to the IRS), plus many of them ended up paying penalties and interest.
The owners were tried, but not for embezzlement or theft. Apparently there were no laws that directly applied to the situation. They were charged with defrauding clients, mail fraud (because the tax forms they filed indicated that the taxes had been paid), conspiracy to interfere with the IRS’s collection of taxes, and filing false tax returns. Some of my friends were called to testify, but fortunately I never was. The husband was sentenced to approximately five years in jail and the wife received a four year sentence, plus they were ordered to pay $5.7 million in restitution.
I wonder if any of the clients has seen a penny of that money.