A Taxing Pyramid Scheme


Whenever you think of a pyramid scheme, you tend to think about product gimmicks out to take advantage of the not-so-savvy consumer – eventually reeling them in to sell the product themselves. Well here’s a new one. Now pyramid schemes are going so far as to take advantage of the unaware business owner. In today’s Fraud of the Day from San Antonio Express-News, a group of executives in San Antonio, Texas gathered together to set up professional employer organizations as part of a modern day pyramid scheme.

The article reports that starting in 2002, a Texas businessmen set up professional employer organizations, or PEOs, which from the outside appeared to have been created to help small businesses outsource the management of finances for their companies. The PEOs claimed to have been taking money from the small businesses to pay the Internal Revenue Service (IRS) for legitimate reasons, including employment payroll taxes. In reality, the PEO executives were pocketing and squandering the money. (Bet they bought some new cars.)

The pyramid scheme came in when the executives continued to create new PEO firms so they could walk away from the tax liability; the businesses that hired the firms thought this was already handled by the services. Not only did the PEO executives steal the money that belonged to the IRS, they are also accused of taking money for workers’ compensation insurance that was not always provided.

By 2008, when the pyramid scheme was discovered, the PEO executives had obtained more than $110 million from tax fraud.

Currently two executives have pleaded guilty – one of which has already served five years in prison for bank fraud committed in the 1990s. (Didn’t learn the lesson after 5 years in the big house? Now that’s a slow learner.? Not only did he already serve time for a similar crime, this executive also used money from the current tax fraud case in order to pay for the restitution of his previous case – which came out to $1.2 million. (So he paid for his former case with stolen money? A class act.)

The two fraudsters could face up to 20 years in prison, but the government has decided to hold off their sentencing until more suspects are found in the case. The IRS has also promised to work with the small businesses that were victims of the PEO firms.

This case is a classic reminder to keep an eye on your money. Here, the small businesses thought they were doing themselves a favor by hiring the PEOs to manage their money, including paying taxes. Instead, the PEOs bilked the businesses – and, in turn, the taxpayers – out of hundreds of millions of dollars.

So, here are the questions of the day? could a similar pyramid scheme be lurking in your jurisdiction? And, if so, how could they be detected?

Source: Today’s ”Fraud of the Day” is based on an article entitled, ”Former Executive Pleads Guilty in $110-Million Tax Fraud,” written by Guillermo Contreras and published by the San Antonio Express-News, May 2, 2012.

A former executive of entities that provided payroll tax services to small businesses pleaded guilty Wednesday to conspiracy and making false statements for his role in a $110 million tax fraud.

Between 2002 and 2008, John D. Walker, 68, of San Antonio, maintained a management role in the firms known as professional employer organizations (PEOs), which he admitted were set up as part of a pyramid scheme.

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Larry Benson
Larry Benson is currently the Director of Strategic Alliances for Revenue Discovery and Recovery at LexisNexis Risk Solutions. In this role, Benson is responsible for developing partnerships for the tax and revenue and child support enforcement verticals. He focuses on embedded companies that have a need for third-party analytics to enhance their current offerings.