Nightmare on Main Street: true tales of tax terror

Some of the scariest stories ever told come straight from court records. These three cases have plenty of Halloween-worthy material. Unfortunately, these aren’t urban legends – they’re completely real.

The gold coin payroll scheme

Paying employees in gold and silver coins sounds like Captain Hook’s payroll strategy. But Las Vegas businessman Robert Kahre thought it was a brilliant way to handle the payroll for his construction businesses. 

Kahre owned six construction-related businesses and provided payroll services for approximately 35 other contractors. Between 1997 and 2003, he ran an elaborate scheme involving gold and silver coins. Employees were supposedly paid in coins, which were immediately exchanged for envelopes of cash. His sister, Lori Kahre, his partner, Danille Cline, and business consultant Alexander Loglia were also involved. 

But here’s where things took a strange turn. The face values of the coins were just one-eighth of the cash wages employees actually received. Workers were told their earnings weren’t taxable or that they should report only the coins’ face values. The scheme involved approximately $120 million in cash wages, with no federal employment taxes withheld or wages reported to the IRS. 

As it turns out, the IRS had a few issues with this payroll arrangement. In 2009, Kahre was convicted of multiple crimes, including conspiracy to defraud the federal government, 49 counts of failing to collect or pay employment taxes, and four counts of tax evasion. He was sentenced to over 15 years in prison and was ordered to pay more than $16 million in restitution. 

For her role, Lori received six years in prison for crimes including tax evasion and making a false statement to a bank. Alexander received 26 months for tax evasion and filing a false return, while Danille received five years of probation, including six months of home confinement. 

You can get creative in your business. We just don’t recommend it for employee compensation and payroll tax obligations. 

If you thought that scheme was bizarre, we’re just getting started. Up next, a billion dollar-scam and a business that learned that being the victim of a crime doesn’t necessarily get you off the hook. 

The billion-dollar biofuel scam

What do biodiesel, luxury cars, and a planned casino in Belize have in common? They were all part of a billion-dollar tax fraud scheme. 

Between 2010 and 2018, five people used Washakie Renewable Energy, a Utah biodiesel company, to claim more than $1 billion in fraudulent fuel tax credits. The group included CEO Jacob Kingston, his brother and CFO Isaiah Kingston, businessman Lev Aslan Dermen, Jacob’s wife Sally Kingston, and the brothers’ mother Rachel Kingston. 

Their scheme was elaborate, to say the least. They purchased biodiesel that other producers had already claimed tax credits on, and then exported it to other countries. Then, shipping records were doctored to bring it back as feedstock, claiming Washakie had produced new biofuel from it. Fake invoices and backdated documents were used to support these claims. 

The group also circulated millions of gallons of biodiesel through shipping networks to make production and sales look legitimate. 

The IRS ultimately paid out more than $511 million in fraudulent credits. Washakie also fraudulently obtained millions of EPA renewable identification numbers and sold them for approximately $65 million. Meanwhile, Jacob and Isaiah transferred more than $134 million to companies in Turkey and Luxembourg, where the money was laundered. 

The group took the term living large to a whole new level. The proceeds funded a $1.8 million Bugatti, a chrome Lamborghini, a gold Ferrari, luxury homes, and a yacht, which was later seized and sold for $10.1 million. Because the fleet of luxury cars and a yacht weren’t ambitious enough, Lev also planned to build a casino in Belize, with Jacob sending him more than $700,000 to purchase land. Over $35 million went to extended family members and their businesses. 

Lev helped orchestrate the whole thing and launder money, even claiming he had law enforcement connections to protect them from prosecution. You can probably guess how that worked out. Jacob and Isaiah helped run the operation, while Rachel and Sally falsified documents.

In 2023, all five received federal prison sentences: 

• Jacob pleaded guilty to mail fraud conspiracy, filing false IRS claims, money laundering, and other crimes. He was sentenced to 18 years in prison, $511 million in restitution, and a $338 million money judgment. 
• Isaiah pleaded guilty to mail fraud conspiracy, helping file false partnership tax returns, money laundering, and other crimes. He received a sentence of 12 years plus $511 million in restitution. 
• Lev was convicted of mail fraud conspiracy and money laundering. He received 40 years, more than $442 million in restitution, and a money judgment of over $181 million. 
• Rachel pleaded guilty to crimes including mail fraud and money laundering conspiracies. She received seven years. 
• Sally pleaded guilty to mail fraud and money laundering conspiracies. She received six years. 

The lesson here is that tax credits aren’t free money. There are eligibility requirements, and falsifying transactions or records to claim credits can have serious legal and financial consequences, as these five found out. 

The payroll nightmare they didn’t see coming

Imagine hiring someone to handle your payroll taxes, handing over the money, and discovering they never sent it all to the IRS. That’s exactly what happened to Pediatric Affiliates, a New Jersey medical practice that hired Menachem Hirsch’s PAL Data Processing to handle its payroll accounting. 

The practice paid money to cover its employment taxes. But Hirsch was sending the IRS less than what was owed and pocketing the rest. In 2002, the IRS notified Pediatric Affiliates that payroll taxes from 1999 and part of 2000 were unpaid. The practice then discovered that Hirsch had misappropriated the funds. 

In 2004, Hirsch was charged with wire fraud and tax evasion. He was sentenced to 37 months in prison and ordered to pay $841,959 to Pediatric Affiliates. But unfortunately for the practice, the story wasn’t over yet. 

The IRS held Pediatric Affiliates responsible for the unpaid taxes. The practice challenged the decision, but a federal appeals court upheld the decision in 2007. It didn’t matter that the company paid Hirsch and he had stolen the money. 

The lesson here is that outsourcing payroll doesn’t mean you can just stop paying attention. Verify that your tax deposits are actually reaching the IRS, or you can be held liable regardless of who’s supposed to send them. 

These three cases show just how out of control business tax problems can be. The takeaway is that you should follow tax rules, vet anyone who’s handling your finances, and always verify that your returns and tax payments are accurate. You can’t protect your business from every horror story, but you can make sure you’re not the one writing the script.