Tax Law Center Blog

The federal indictment of Lorena Padilla of Villa Park, California, and her co-defendants is not merely a case of employment tax delinquency. It is a definitive example of how the government targets sophisticated schemes involving the willful evasion of tax obligations, resulting in an alleged $90 million tax loss. This case holds critical lessons for tax professionals advising clients in high-turnover sectors like the staffing industry.

The Criminal Strategy of Concealment

The indictment, brought in the U.S. District Court for the Central District of California, alleges a systematic fraud spanning years across multiple staffing entities. The scheme’s severity stems from the alleged methods used to conceal the failure to account for and remit taxes:

• Trust Fund Diversion: The core violation is the continuous failure to pay over federal and state employment taxes withheld from temporary workers’ wages. These taxes are held in trust for the government, and their diversion for personal use—such as the luxury assets and real estate detailed in the indictment—forms the basis for the Money Laundering Conspiracy (18 U.S.C. § 1956(h)) charge.
• Exploitation of Labor Status: Crucially, the indictment alleges that the defendants actively hired large numbers of workers without proper legal authorization. This was allegedly a deliberate strategy to conceal the scheme, as the defendants anticipated that this population would be less likely to file federal income tax returns or alert the IRS to the companies’ ongoing failure to account for and pay over the taxes. This alleged intent to conceal the tax crime through labor practices is a key element that demonstrates willfulness under 26 U.S.C. § 7202 (Failure to Account for and Pay Over Employment Taxes).

Importance for Tax Advisors

For tax practitioners, this case is a stark reminder of the elevated risk in client representations involving employment tax non-compliance:

• Evidence of Willfulness: The deliberate actions to exploit a vulnerable workforce to facilitate tax evasion provide undeniable evidence of willfulness, transforming a civil tax debt into a serious criminal matter.
• The Trust Fund Recovery Penalty (TFRP): The civil exposure for clients remains important. Independent of criminal charges, 26 U.S.C. § 6672 allows the IRS to pursue responsible persons personally for the entire amount of the unpaid trust fund taxes, including company officers or owners who had the authority to direct payments.