Earlier this month, Cruz E. Galvan, who operated Four Star Drywall, was sentenced to 18 months in federal prison and ordered to pay the IRS over $780,000 for an under-the-table payroll scheme that he had been running for years (Union Leader, 02/10/16).
Galvan pleaded guilty to one count of federal employment tax evasion after admitting that for more than two years, he paid his employees with vouchers instead of checks. Workers were told to present the vouchers to a local check-cashing business, where they could trade them in for cash. Galvan did not report any of these wages to the IRS, evading federal income tax, social security, Medicare, and unemployment taxes.
This behavior is emblematic of the underground economy in construction and the schemes contractors use to avoid paying their fair share of taxes. The overall underground economy consists of an estimated $2 trillion in unreported income in the United States1, and results in a huge loss in income tax and unemployment insurance tax to the Commonwealth of Massachusetts. In 2014 alone, the Council on the Underground Economy recovered more than $20 million in wage restitution, state taxes, unemployment taxes, fines, and penalties2.
1 America’s Underground Economy, Richard Cebula and Edgar Feige (2011).
2 2014 Annual Report, Joint Task Force on the Underground Economy and Employee Misclassification
