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Day School Owners Lose Tax Fraud Appeal

By Tanya Roth, Esq. on September 25, 2012 | Last updated on March 21, 2019

The Internal Revenue Service isn’t kidding around when it comes to tax evasion. The Third Circuit Court of Appeals recently ruled in favor of the IRS by upholding the convictions of the owners of the Day School for Children in New Castle, Delaware.

While this sounds like a run-of-the-mill boring tax case, the facts are somewhat egregious. Well, they’re egregious in the sense that this couple actually thought they could get away with going under the table so blatantly.

The two owners in question, Troy and Monnie Dorsey, were found to be in violation of tax laws for the years of 2004 to 2006. Not only did they file false tax returns, but they also structured cash deposits to avoid paying tax.

In short, these two essentially ran an "under-the-table" operation to the fullest extent. They insisted that several parents pay them in cash. They paid many of their teachers in cash. They even refused to provide their teachers with tax forms to report the income, encouraging the teachers not to file tax returns or report income earned from the school!

So is it a wonder that these two were caught?

The problem for the Dorseys is that they were cash rich. They tried to avoid triggering IRS suspicion by depositing amounts less than $10,000 at a time. Smart, considering the banks can tip the IRS off if amounts over $10,000 are deposited at once.

The Dorsey's focused their appeal on the idea that the evidence presented at trial was insufficient to support their convictions. The Third Circuit rejected those arguments.

The government used the "bank deposit method" to show that the Dorsey's had unreported income; a method which was flawed, the Dorsey's claimed.

The method required the IRS to show that the defendants had a lucrative business and made periodic, regular cash deposits into their accounts. The IRS also had to show that the difference between the deposit and the withdrawals reflected income and that this income was not reported. The exact amount need not be proven. The important thing is that the understatement be substantial.

The Dorsey's argued that this method was applied inaccurately, as the cash on hand (i.e. the cash already in the account) wasn't appropriately determined.

Unfortunately for the Dorseys, the IRS agent they were dealing with was quite thorough and the results of his investigation were well substantiated.

The couple is serving a 41 month sentence.

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