Government’s tax evasion case did not add up

Sometimes prosecutors have the right guy but may not have all the facts right. This is a case where the government got just about everything wrong. Their math was bad. Their methods were sloppy. Their conclusions were wrong.

Tax fraud charges against a Seattle restaurant owner were originally announced as the largest sales suppression case in state history. But upon further review, the Washington Department of Revenue has dropped the case entirely. It’s a cautionary tale about the damage that a well-intentioned or overzealous prosecution can do to innocent citizens.

Tax fraud by sales suppression is a real problem

The Internal Revenue Service and state agencies have stepped up efforts to prosecute sales suppression as a tactic to avoid paying sales taxes. Some business owners use illegal “zapper” software to erase cash transactions from point of sale computers. They then pocket that money without paying taxes.

Although the software itself is nearly undetectable, government investigators are getting more savvy in tax fraud prosecutions. An audit will reveal telltale signs such as an unusually low percentage of cash transactions. The practice is prevalent in restaurants and other businesses that take in a lot of cash. Experts estimate that sales suppression siphons off tens of billions of dollars each year from state and federal tax collections.

Restaurant owner was wrongly accused of $5.6 million tax theft

One of the methods for prosecuting sales suppression is to have undercover agents buy meals with cash to see if those transactions are later “zapped” from the books. Salvador Sahagun, who owns six taco restaurants, was suspected of skimming cash with suppression software.

When some of those cash receipts were missing, the Department of Revenue thought they had their man. They extrapolated the number of missing receipts to estimate that Sahagun had cheated the state of $5.6 million in sales taxes. Charges were publicly announced and business at the taco shops suffered.

But then the high-profile prosecution unraveled. The “missing” receipts were located. No evidence of zapper software was uncovered. And the defense pointed out that to rip off $5.6 million in taxes the restaurant chain would have needed $56 million in sales. As his attorney quipped: “I did the math. That’s a lot of tacos.”

Tax prosecutors are not going away

The IRS often works closely with state tax authorities. The Great Taco Debacle was no doubt a blow to the war on sales suppression. But the next time around prosecutors will double-check their math and get all their ducks in a row before bringing the hammer down.

It is unlawful to possess or use “zapper” software to tamper with financial transactions after the fact. (Though, ironically, courts have ruled that it is not illegal to make or sell such programs.) Business owners are playing with fire if they think they can continue to get away with this.

Prosecutors are eager to make an example of unscrupulous business owners to tamp down on the practice. And too often that zeal means that honest business owners and their employees get dragged through the mud.