Monday, September 08, 2008

Zappers and Tax Evasion

You may have seen the article in the August 30 edition of the New York Times that discusses the use of “zappers,” computer software that can be used to siphon cash from a business’ receipts.

As the Times article explains, zappers are used to alter the electronic sales records in a cash register: If the business is a restaurant, the owner uses the zapper to erase the register’s record of food orders the total cost of which is equivalent to the amount of money the owner has siphoned from the take. The point, of course, is to avoid paying income tax (and maybe other taxes) on the entirety of the business’ receipts.

It’s old wine in new bottles – an old scam in a new guise. As the article notes, before cash registers and records were computerized, businesses used to keep a double set of hard copy books and use the second set – the modified set – to conceal the unreported income. Interestingly, the article says that the U.S. Internal Revenue Service doesn’t seem to have a handle on the user of zappers; it quotes an IRS representative as saying that the agency doesn’t track the use of zappers, which I interpret as saying that the IRS is not trying to find out how often they are being used.

The article also says the province of Quebec has aggressively pursued the use of zappers. The province’s tax collection agency has apparently conducted over 230 investigations involving the use of zappers.

There have, apparently, only been two prosecutions in the U.S. that involved the use of zappers to evade the payment of income tax. I thought I’d focus on one of them to illustrate how what we have here is an old crime being committed in a new way. This is not an area in which we need new law (unless we decide to outlaw the creation and/or use of zappers, which I’ll get to later).

The case is from Detroit. The defendant was (is) Talal Chahine. Here are the facts in the case, as taken from a 2007 U.S. Department of Justice press release:
Talal Khalil Chahine is the sole owner of La Shish, Inc., a Middle Eastern restaurant chain located in the Detroit, Michigan metropolitan area. The Indictment alleges that Talal Chahine conceived and executed a thescheme to skim cash proceeds from the restaurants for the tax years 2000 through 2004.During those tax years, La Shish, Inc. maintained a double set of computerized books, records and balance reports, one actual and one altered. The altered records were produced by a complex computer program that artificially reduced the amount of receipts in the form of cash that was actually received by the restaurants. Talal Chahine oversaw the maintenance of the double set of books, as well as the skimming and concealment of more than $20,000,000 in cash received by the restaurants. To evade government scrutiny, the skimmed cash was not deposited into U.S. bank accounts, but instead, at the direction of Chahine, converted into cashier’s checks made out to persons located in Lebanon and reduced in physical size by changing small denomination notes into larger denomination notes. These conversions were made for the purpose of transporting the cash outside the United States to Lebanon, away from U.S. government reach and detection.
U.S. Attorney for the Eastern District of Michigan, Superseding Indictment Returned against La Shish Owner (May 30, 2007).

I found what I believe is the superseding indictment the press release refers to. You can find it here, if you’d like to check it out. It essentially repeats the factual allegations in the press release, and then contains five counts, each of which charges Chahine with tax evasion in violation of 26 U.S. Code § 7201. Here’s an example:
COUNT FIVE: Income Tax Evasion

From on or about January 1, 2004 through on or about April 15, 2005,
within the Eastern District of Michigan, Southern Division, TALAL KHALIL
CHAHINE, defendant herein, did willfully attempt to evade and defeat income tax in
the approximate amount of $1,077,567 due and owing by him to the United States of
America for the calendar year 2004, by failing to make an income tax return on or
before April 15, 2005, as required by law, to any proper officer of the Internal
Revenue Service, by failing to pay to the Internal Revenue Service said income tax,
and by concealing and attempting to conceal from the United States of America his
true and correct income and the nature and extent of his assets and the location thereof, all in violation of Title 26, United States Code, Section 7201.
In 2005, Chahine apparently fled to Lebanon, to avoid prosecution on these charges; according to news stories, he remains a fugitive. Christy Arboscello, Palm Palace to Take over La Shish Restaurants, Detroit Free Press (July 10, 2008). He may never be caught, and never face trial on the charges.

As I noted earlier, we don’t need new law to address the “harm” the zappers are being used to inflict . . . the evasion of income (and maybe other) taxes. We could, I suppose, outlaw the creation and sale of zappers, but I don’t really see the need to do that. The point, after all, is to keep people from using them, and the best way to do that would seem to be to aggressively prosecute people like Chahine, who are using them to avoid the payment of taxes. According to the Times article, government may be losing a LOT of revenue to zapper-facilitated-fraud.

I don’t know how you crack down on that. Maybe there’s some way to come up with a counter-program . . . software that can detect the presence of a zapper? Or maybe you could require business – particularly business in the food and entertainment services, which is where this seems likely to happen – to install some kind of program that would monitor the registers and detect the use of a zapper or any other kind of program that could hide money.

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