A New Jersey owner of several pharmacies was charged by indictment and arraigned today on charges of conspiracy to defraud the IRS by engaging in a "cash skimming" scheme. The indictment alleges that the pharmacy's owner, his relative, and the pharmacist co-owner conspired to conceal cash income of pharmacies and did not report it on income tax returns. The indictment also alleges that the pharmacy's co-owner was paid a portion of his salary in cash.
This case should be of great concern to retail pharmacies. It is possible that it represents a new trend in investigations and prosecutions of pharmacies and their owners. While IRS audits focused on under-reporting cash income are common, federal criminal prosecutions for tax evasion, and especially conspiracy to defraud the IRS, are relatively rare. In the past, prosecutors have focused on "cash heavy" businesses, such as restaurants. For instance, in May 2018, co-owners of a Paterson, New Jersey, restaurant plead guilty to tax evasion, by admitting to manipulating cash registers and falsifying accounting records. There were no charges of conspiracy filed in that case. In 2012, the then Manhattan U.S. Attorney Preet Bharara charged nine owners of gourmet food markets for conspiring to hide over $56 million from the IRS. That case involved the food markets maintaining two sets of books. However, it is rare to see criminal charges arising out of not depositing cash receipts, let alone charges of conspiracy to defraud the IRS, in the absence of manipulation of books or creating false records.
Conspiracy charges are usually more serious offenses than the underlying "predicate acts". They require proof of coordination and planning among several individuals with intent to defraud. Prosecutors, as well as forensic accountants, usually rely on certain "hallmarks" of "cash skimming," such as maintaining multiple sets of books, doctored bookkeeping records, or, most importantly, no records of cash receipts or deposits.
It is important for pharmacy owners to take note of this new development. In the age of sophisticated sales management computer systems, many pharmacies still use old cash registers for recording sales. Worse yet, many stores lack even the most basic procedures for tracking sales. Some pharmacies rely on computer systems provided by pharmacy management software vendors that are complicated to use and require highly-trained staff in order to be properly and fully functional. Investing in easy and comprehensive sales tracking systems that keep audit logs and record all transactions is key. It is also highly advisable for pharmacies to develop a system to record and reconcile transactions on an ongoing basis.
To prove conspiracy to defraud, the Government needs to prove intent. Sometimes intent is difficult to infer, but such actions as depositing small amounts of cash but concealing large cash receipts, commingling cash from bill-payment services with cash received from customers, and maintaining multiple sets of books, could be dead giveaways.
Pharmacies need to be aware that they are increasingly at the forefront of the government's investigation and prosecution efforts, and must step up measures to ensure fraud, waste and abuse compliance. It is critical that pharmacy owners assess their compliance policies and procedures, and implement effective preventive measures.
For guidance from expert legal counsel on all operational and compliance-related matters, do not hesitate to contact our knowledgeable and experienced attorneys at 212-668-0200 or by email at firstname.lastname@example.org.