Firms in a bind after payroll operators charged with fraud - | WBTV Charlotte

Firms in a bind after payroll operators charged with fraud

CHARLOTTE, NC (Deon Roberts/The Charlotte Observer) -

The operators of Piedmont Fiberglass realized something was amiss when state and federal authorities informed them they owed thousands of dollars in payroll taxes they thought they had already paid.

The Internal Revenue Service and North Carolina Department of Revenue were demanding $15,000 in taxes, penalties and interest, said Angela Caudle, office manager for the Taylorsville manufacturer, which employs about 35.

“It was just a complete shock,” Caudle said. “We'd never had any issues.”

Piedmont had been relying on a Cornelius-based payroll firm, Employee Services Net, to make sure the taxes were collected and sent to the IRS and the state, she said.

But according to federal prosecutors, the payroll company's operators were running a scam.

Last month, prosecutors accused William James Staz, 72, of Huntersville, and son James William Staz, 43, of Iron Station, of stealing more than $11 million from at least 113 clients of their roughly 10-year-old payroll firm.

According to the criminal indictment, James and William Staz used money intended for clients' payroll and employment tax payments to fund their personal lifestyles.

For example, the younger Staz spent some of the money on strip clubs and a new Mercedes Benz, prosecutors said. He also used the money to pay for a “lavish” Iron Station luxury home featuring a three-tiered swimming pool, “cascading” waterfall and wet bar, prosecutors said.

Moreover, the elder Staz continued to be involved in the company's operations after he was imprisoned in 2008 for about a year for a federal bank fraud conviction, according to prosecutors.

Piedmont Fiberglass had no idea William Staz had gone to prison, Caudle said.

Attorneys for James and William Staz could not be reached. William Staz declined to comment when reached by phone by the Observer.

The Cornelius case joins some two dozen other federal fraud cases involving payroll companies in recent years. Critics of the industry say those cases highlight the need for more regulations for the industry.

The case also comes at a time when many small businesses are turning to payroll companies, likely because of the complexity of payroll taxes, the National Small Business Association said in an April report. One in three small companies spends more than $6,000 a year on outside payroll services, according to the report.

Payroll industry officials say that fraud against clients is rare and that most payroll companies are honest.

“Ninety-nine percent of these companies are not going to have a problem,” said Bill Dunn, director of government relations for the American Payroll Association. “But that 1 percent is really going to cause a big black eye for the rest of the industry.”

The U.S. Department of Justice criminally prosecuted at least 24 owners and operators of payroll firms who stole about $300 million in employment taxes from thousands of clients from 2007 to 2012, according to the Taxpayer Advocate Service, part of the IRS.

Businesses who are defrauded face this harsh fact: If a payroll firm runs off with their tax payments, the clients are still on the hook to taxing authorities – sometimes for tens of thousands of dollars. That means clients can end up paying the same amount twice: first to the payroll firm that misused the funds and then to the taxing authorities that still want to be paid.

According to prosecutors, Employee Services Net at its height had about 500 clients in multiple states. The indictment says one of the clients, which it does not name, provided services to children with developmental disabilities.

Calls for more regulation

In North Carolina, payroll companies remain unregulated, said Trevor Johnson, spokesman for the N.C. Department of Revenue. People who work for a payroll company don't need a license, even though they have direct access to businesses' sensitive financial information and bank accounts.

By contrast, anyone who makes a residential mortgage loan must be licensed by the North Carolina commissioner of banks.

John Hettwer, president of Payroll Plus, an 18-year-old third-party payroll company based in Cornelius, thinks the industry does not need more regulations. In May, he acquired roughly 275 Employee Services Net clients when he bought company assets out of bankruptcy.

“Regulation alone will not eliminate fraud,” he said. “Hundreds of thousands of tax payments are being made by third-party processors across the nation today without incident. Like in any industry, you can't regulate integrity.”

Dunn said his association has backed ways to self-regulate the payroll industry.

For example, the industry supported an IRS requirement, now in effect, that payroll companies pay their clients' federal taxes electronically. That allows clients to track their payments on a federal database, the Electronic Federal Tax Payment System, he said.

Horacio Lopez, president of the Independent Payroll Providers Association, said some states have a similar database that allows payroll firm clients to see whether their taxes have been paid to state authorities. Johnson, of the N.C. Department of Revenue, said North Carolina does not have such a database.

Recovering money is tough

When a payroll company scams a small business, recovering the money is typically hard.

Wayne Sigmon, court-appointed trustee for the bankruptcy cases involving Employee Services Net and a related company, eePayrollservices, said it's “highly likely” the companies' creditors will still be responsible for their unpaid taxes and penalties.

That's because there might not be enough company assets to liquidate to cover the $16 million in claims filed so far, he said.

Employee Services Net and eePayrollservices are both shut down, Sigmon said.

It remains to be seen how much in restitution former clients might receive in the federal case against the Stazes.

In North Carolina, payroll firm clients can apply for penalty waivers, which are evaluated on a case-by-case basis, said Johnson, of the N.C. Department of Revenue.

Piedmont Fiberglass, which makes a range of products from church steeples to water slides, has won approval from the IRS to waive penalty payments, Caudle said. But the company has not yet heard back from the state regarding a waiver request.

Her company has already paid the IRS what it owed the agency. Piedmont Fiberglass is making monthly payments to extinguish its penalty, taxes and interest debt to the state.

James Staz has been in federal custody pending trial since being arrested in connection with the allegations. An initial court appearance for William Staz is set for Tuesday.

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