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“Zapper” software and tax fraud penalties

In neighboring Connecticut, a Chinese restaurant owner accused of using “zapper” software faces serious tax fraud penalties. Massachusetts also assesses a sales tax on meals.

How does the software avoid state sales tax? Zappers are a type of “phantom-ware” that skews point-of-sale records to understate the amount of tax to collect.

Accusations and broader investigations

Special Agents from the Criminal Investigations Unit accuse the restaurant owner of using a zapper from 2008 to 2016. The device allegedly allowed her to avoid more than $80,000 in state taxes. Penalties and interest could add another $60,000 to her tax bill.

Her arrest for zapper use was a first for the Connecticut Department of Revenue Services. Criminal charges included possession of tax suppression software, larceny and filing a false tax return.

Connecticut has worked with other states to find ways to detect “zapper” fraud and prosecute it. This case actually started with a routine tax audit. Connecticut Department of Revenue Services auditors were able to detect the illegal use of the software. As specialized training to identify zapper use spreads, more investigations might be coming across the North East.

Massachusetts penalties on late/false returns

The Department of Revenue (DOR) has two penalties (late payment or late filing of returns) similar to the IRS:

  1. Late payment penalty: one percent the tax balance per month (that caps out at 25 percent).
  2. Failure to file timely penalty: one percent of the balance per month (up to a maximum 25 percent).

Interest adds on top of the penalties, so a past due balance can start to snowball when a restaurant gets behind on payments.

Underpayment that results from negligence or disregard of state tax laws could result in another penalty. If the underpayment exceeds 10 percent of the tax required or $1,000, a 20 percent penalty is possible. Willful tax evasion is a criminal felony charge. It could mean up to five years in prison and a fine up to $100,000 for an individual or $500,000 for a corporation.

With the serious penalties that might stem from a tax audit, seek the counsel of an experienced tax attorney at the first sign of trouble.

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