TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

There’s been a recent uptick in state and federal prosecutions of restaurants who use sales-suppression software (also known as “zappers”) that delete transactions on computerized point-of-sale systems, as governments have finally woken up to the fact that they are losing tens of billions of dollars per year in underreported sales and income taxes. These zapper programs are a modern update to an age-old practice in cash businesses – keeping one set of “real” books and another, showing lower sales, to give to the tax collectors. In the past few years, the IRS has teamed up with state taxing agencies on cases, training, and software to detect businesses – primarily restaurant so far – that are submitting false sales and income figures.

In the article, my brother Kirk, a Seattle attorney who defended a low-level zapper salesperson in the first prosecution of a zapper distributor, and I tracked the increasing frequency of zapper prosecutions. Kirk’s client’s case resulted from a federal-state partnership, whereby a restaurant owner was prosecuted by the State and Kirk’s client was prosecuted by the US Attorney’s Office. As we noted, what started out as one zapper prosecution every decade has increased to one prosecution every few months. We also discussed that states are sending their tax investigators to zapper training, hoping to detect and nab businesses who are using the software.

As if on cue, two months after our article, the next case dropped. On March 9, 2018, the Washington Attorney General filed charges against the owner of seven Tacos Guaymas restaurants for zapping more than $5.6 million in sales tax under a 2013 Washington law that specifically outlaws using zapper software. The AG touted the case as “potentially the largest in the country,” which very well may be true. Washington’s sales tax rate is roughly 10 percent, so the restaurants allegedly zapped more than $50 million of sales.

It’s worth noting this case was brought in Washington State. Washington is on the forefront of investigating and prosecuting zapper cases, and it appears they now have the expertise – using undercover agents as well as computer forensics – to investigate the cases without the IRS’s help. The IRS isn’t mentioned in the press release, which in the world of law enforcement would be a major faux pas if the IRS were involved. This development should make cash businesses in Washington as well as other states that have devoted training and agent resources to zapper cases – including Connecticut, Illinois, and California – nervous.

If you’d like to learn more, please forward an email requesting a copy of the article referenced above.

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax, and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the USAO’s Criminal Division, and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white-collar criminal investigations including money laundering and health care fraud. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).