Check it out: I’ve now found $1B in lost revenue
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You would have to know Joe Mazzilli to understand why he’s so angry that New York State and the city are losing hundreds of millions of dollars in revenue each year by sanctioning questionable check-cashing operations.
Mazzilli is a former undercover NYPD detective who worked with the more famous Joe Pistone,a k a Donnie Brasco. In fact, Mazzilli and Pistone today are partners in a venture to make television shows.
But I’m digressing just to get your attention.
More than six years ago Mazzilli, who is now a private investigator, came across what he believed — and still believes — is a scam by which companies can hide income and cheat on their taxes.
Here’s how it works: Let’s say the manager of an apartment building needs some repairs done. He hires a contractor, who obviously wants to give the best price so he (and not a competitor) gets the job. The contractor, of course, also wants to optimize the amount of money he earns on the job.
A contractor could do business the right way: finish the job, collect his money, take the check to a bank and, ultimately, pay sales, income and payroll taxes.
Aha! But there’s the other way.
The contractor knows he’ll have a big advantage if he doesn’t have to pay tax on the money he is earning. He also knows it is easier to skip taxes if the check he receives doesn’t go through regular banking channels and is “structured” in a certain way — primarily, by staying under the $10,000 limit that today will draw scrutiny.
So, what does he do?
When he gets his money, instead of taking the check to a regular bank, where the audit trail would be obvious to the Internal Revenue Service as well as state and city tax officials, the contractor instead goes to a check cashing operation.
The contractor walks away with a pocket full of cash. The check-cashing operation takes a cut of the check’s face value, then it delivers the check to its bank. And tax authorities are never wise that the transaction between the building manager and the contractor ever took place.
Mazzilli wasn’t blowing the whistle on check-cashing operations that you and I know: the ones with storefronts that cater to ordinary people who simply don’t have a relationship with a regular bank.
No, these joints deal exclusively with corporate checks like I just described.
I’m just picking on contractors to make this easier to understand. But anyone who is trying to hide income can follow the same procedure.
How much does the city, state and federal government lose on this scam? Nobody really knows because the volume of such deals is — by it’s very nature — hidden from view.
But people who’ve looked into the matter say they wouldn’t be surprised if the state alone was losing at least $200 million a year in revenue. And remember, that doesn’t include any money that aggressive state enforcement could recoup from past years.
Keep in mind that Mazzilli first blew the whistle on this scam in 2004. So if a case can be made against anyone, there would be a half-decade of revenue to recoup.
The oddest thing of all is that the New York State Banking Commission actually licenses these check-cashing businesses, ostensibly so that people doing jobs can get quick cash to meet expenses. But people who’ve investigated say that the main use is for tax evasion, although cash transactions like these also come in handy when companies need to hire illegal workers or pay kickbacks.
In the lingo of the banking community, what I’ve just described is called “third-party checks,” meaning the cashing firm isn’t the one to whom the check was originally written. Mazzilli handed over copies of thousands of checks to New York State tax officials. And he still has copies of these checks — a fact I know because he offers them to me anytime I bring up this subject.
“There’s no legitimate reason for this type of corporate check-cashing operation to be in business,” said Tom Stanton, who, until he was fired for being quoted in one of my columns last year, was director of enforcement for the New York State Taxation and Finance Department.
The Manhattan District Attorney’s office has been pursuing individual cases for years. But such legal investigations take a long time to conclude and, ultimately, only a limited number of people targeted ended up being punished.
In fact, the account I hear is that New York State turned over its evidence to the Manhattan DA You’ve heard the old saying “passing the buck.” Well, in this case it’s like passing a billion bucks.
All of this has Mazzilli, who is used to breaking down doors, puzzled: “I brought this to the governor’s office and to the NYS Tax and Finance. They said I gave them a ‘conviction kit.’ It’s now five years later and they didn’t stop the problem.”
Readers: Back on Jan. 13 I promised that by April 18, I would find $1 billion in tax revenue that New York State was simply failing to collect. I have to apologize now be cause I’m way ahead of schedule and not finished yet.
There’s no way to put a solid number on these tax scams. But as I mentioned in previous columns, investigators think crooks are stealing at least $400 million a year from Albany through fake tax refunds (1/13/11 column); another $400 million through dishonest cash registers that under-report sales (1/25/11 column) and now $200 million from shady check-cashing operations.