The Tax Times

Tuesday, December 16, 2025

$90 Million Payroll Tax Scheme: How a California Staffing Owner Turned Trust Funds into a Criminal Case

The federal indictment of Lorena Padilla from Villa Park, California, and her co-defendants reveals a sophisticated, decade-long scheme that goes well beyond routine employment tax delinquency. Prosecutors charge willful failure to pay over $90 million in trust fund employment taxes, wire fraud conspiracy, and money laundering conspiracy across multiple staffing companies in Los Angeles and Riverside counties. These entities allegedly withheld taxes from temporary workers' wages but deliberately failed to remit them to the IRS or California authorities while misleading clients about payroll compliance.

Undocumented Labor as Concealment Strategy

A hallmark of the alleged fraud involves Next Level Staffing's heavy recruitment of undocumented workers, whom defendants purportedly viewed as less likely to report discrepancies or file tax complaints. This tactic not only hid unreported payroll but also bolstered the government's willfulness argument under 26 U.S.C. § 7202, elevating the case from civil negligence to criminal intent. The scheme persisted for over ten years, generating massive tax losses while clients believed their Forms 941 and workers' compensation obligations were handled.

Fraud and Laundering Charges Add Layers

Wire fraud counts stem from false representations to business clients who outsourced full payroll services, expecting proper tax withholding and filing. Money laundering allegations tie diverted trust fund taxes to luxury purchases like high-end homes, vehicles, rental properties, and international travel, routed through layered accounts and entities to obscure the source. This multi-count structure reflects DOJ's aggressive stance on payroll tax diversion schemes, where business revenue directly funds personal extravagance instead of government remittances.

Family and Associates in the Crosshairs

Padilla's daughters, brother, and other managers face charges, underscoring shared responsibility in the operation. For tax professionals, this pattern signals high civil exposure under the Trust Fund Recovery Penalty (26 U.S.C. § 6672), where any "responsible person" with payroll control authority risks personal liability regardless of criminal outcomes. The indictment demonstrates how staffing industry models with high turnover and vulnerable labor pools draw intense IRS Criminal Investigation scrutiny.

Lessons for High-Turnover Businesses

This case warns owners in staffing, temp agencies, and similar sectors: trust fund shortfalls quickly escalate to federal charges when paired with concealment, client deception, or lavish spending.

Proactive steps include immediate remediation of delinquencies, clear documentation of correction efforts, and avoidance of undocumented labor reliance—which prosecutors now flag as evasion intent.

Businesses facing IRS employment tax notices should engage experienced defense counsel early to navigate collection, TFRP assessments, and potential criminal referral risks.

Have Payroll Tax Problems?

Contact the Tax Lawyers at
Marini & Associates, P.A.

for a FREE Tax HELP Contact Us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888-8TaxAid (888-882-9243)

Sources:

1. https://patellawoffices.com/blog/planning-for-tax-minimization/the-90-million-red-flag-concealment-trust-funds-and-the-peril-of-undocumented-labor-in-the-padilla-indictment/

2. https://www.whittier360newsnetwork.com/post/whittier-woman-arrested-in-90-million-tax-fraud-scheme-raises-questions-about-recent-anti-ice-act

3. https://www.irs.gov/compliance/criminal-investigation/orange-county-staffing-company-owner-arrested-on-federal-indictment-charging-her-with-masterminding-90-million-tax-fraud

4. https://www.justice.gov/usao-cdca/pr/orange-county-staffing-company-owner-arrested-federal-indictment-charging-her

5. https://www.businessblunders.com/p/getting-the-lead-out-at-lowes

6. https://www.nyccriminalattorneys.com/payroll-tax-fraud-and-form-941/

7. https://latefbar.com

8. https://www.reddit.com/r/LosAngeles/comments/1p3ybu6/orange_county_staffing_company_owner_arrested_on/

9. https://shows.acast.com/the-irvine-daily-news-now/episodes/691fb3c75f27d8c1bfa1fa0f

10. https://patellawoffices.com/blog/2025/11/21/

11. https://kpmg.com/us/en/taxnewsflash/news/2025/12/final-proposed-regulations-income-foreign-governments-international-organizations.html

12. https://www.federalregister.gov/documents/2025/12/15/2025-22775/income-of-foreign-governments-and-of-international-organizations

13. https://www.pwc.com/us/en/services/tax/library/treasury-releases-final-and-proposed-regs-on-section-892.html

14. https://news.bloombergtax.com/daily-tax-report-international/irs-issues-proposed-final-regs-on-foreign-government-income

15. https://www.weil.com/~/media/files/pdfs/Weil_Private_Equity_Alert_Dec_2011_.pdf

16. https://scholar.smu.edu/cgi/viewcontent.cgi?article=3090&context=smulr

17. https://www.morganlewis.com/pubs/2023/01/irs-issues-proposed-regulations-applicable-to-qualified-foreign-pension-funds-and-sovereign-wealth-funds

18. https://kpmg.com/kpmg-us/content/dam/kpmg/pdf/2023/irc-section-892.pdf

19. https://www.jdsupra.com/legalnews/proposed-regulations-would-impact-8467688/

20. https://nysba.org/wp-content/uploads/2025/03/1257-Letter.pdf

21. https://www.law360.com/articles/2421473/treasury-issues-final-rules-for-taxing-foreign-gov-t-income

22. https://www.proskauertaxtalks.com/2023/01/new-proposed-regulations-would-impact-the-determination-of-domestically-controlled-reit-and-structures-for-sovereign-wealth-funds-us-real-estate-investments/

23. https://www.irs.gov/individuals/international-taxpayers/foreign-governments-and-certain-other-foreign-organizations

24. https://www.law.cornell.edu/cfr/text/26/1.892-2T

25. https://www.akingump.com/a/web/5292/20-01-17-Akin-Fenn.pdf

26. https://www.federalregister.gov/documents/2025/12/15/2025-22776/income-of-foreign-governments-and-of-international-organizations

27. https://taxnews.ey.com/news/2025-2491-breaking-tax-news-treasury-and-irs-issue-final-and-proposed-regulations-under-irc-section-892-on-taxation-of-foreign-government-income

28. https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2011/11/the-irs-releases-proposed-regulations-regarding-taxation-of-investments-by-foreign-governments.pdf

29. https://www.law.cornell.edu/cfr/text/26/1.892-5T

30. https://www.skadden.com/insights/publications/2023/01/new-proposed-regulations

31. https://davidlat.substack.com/p/scotusblog-founder-tom-goldstein-indicted-for-tax-evasion-mortgage-fraud

32. https://www.nytimes.com/topic/subject/tax-evasion

33. https://muc.co.id/en/article/irs-documents-leaked-tax-avoidance-of-the-worlds-richest-people-uncovered

34. https://www.acfe.com/acfe-insights-blog/blog-detail?s=high-profile-fraud-cases-first-half-2025

35. https://kkc.com/blog/irs-2024-dirty-dozen-highlights-major-tax-scams-including-abusive-tax-schemes/

36. https://www.mcafee.com/blogs/internet-security/the-top-tax-scams-of-2024/

37. https://www.taxcontroversy.com/blog

38. https://www.eidebailly.com/insights/blogs/2024/4/roundup20240411

The Deceptive Simplicity of Form 706 NA

For those of you whose practice involves international tax, I would like to take this opportunity to explain the deceptive simplicity of the form 706 NA.

You must have a client who is a nonresident alien who dies. He/she owns US situs assets so you look at section 2014 of the Internal Revenue Code; you correctly determine that since these assets exceed $60,000 in value, the estate is required to file a form 706NA which is the form analogous to a 706 in the hands of a nonresident alien. The form itself is deceptively simple-two pages-what kind of problems can this create? Once you start reading the form, you realize that to complete it properly, you may have to incorporate almost every schedule which appears in a 706.

The deceptive part of the form occurs when you are trying to determine which of decedent’s US assets (based on section 2014) are taxable by the United States.

The United States has more than 20 tax treaties or conventions with foreign countries designed, for the most part, to eliminate double taxation. It is critically important for you, the preparer, to determine which, if any, treaties may exist to reduce the tax liability of your client.

The IRS, on its website, has a list of the countries which currently share estate tax treaties/conventions with the United States. Even this provides only a partial clue.

Example- You have a client who was a German who lived in Brazil. Since the decedent was a German citizen, you make the assumption that treaty benefits will be available to his/her estate. Not always so. Some of the treaties base their benefits on decedents who are domiciliaries of but not necessarily citizens of a particular country. Ergo, you learn that the estate of the German client domiciled in Brazil cannot utilize the benefit of the German treaty.

Additionally, since some treaties are predicated on domicile while others are predicated on both domicile and citizenship, you may find yourself in an anomalous situation where you have more than one treaty you can elect to apply. In this particular case, use the treaty which best suits your client.

As a rule, the 20 or so treaties are generally address estates of decedents who were citizens of Europe, England or Canada. There are no treaties with South or Central America or Africa. Remember, however, that some treaties are based on citizenship, not domicile. Therefore the estate of an English citizen domiciled in Sudan could benefit by the UK tax convention.

The benefits as well as the applications of the treaties very widely. This is a result of the fact that these treaties were negotiated over various periods of years from the 1950s to the year 2000. The treaties themselves must be read carefully. They are, for the most part, extremely poorly drafted and difficult to fathom. In the case of confusion, look up the meaning of what the treaty means in a publication called the technical explanations of treaties which are a little bit better written but still no works of Shakespeare. Remember, if you fail to utilize an existing treaty and it costs your client a significant amount of money, you may become involved with your insurance carrier. For those of us who are attorneys, remember the hornbook, Prosser On Torts. As I recall, and it's been a while, the first topic addressed is “negligence, the basis of liability”. If you fail to find and utilize an existing treaty, you are negligent and potentially headed for big trouble.

Some of you feel that the IRS will find incorrect your failure to utilize an estate tax treaty. Not so. First of all, not all estate tax returns are selected for examination, so if the return you filed failing to utilize a treaty is not examined, there is no way that treaty benefits will inure your to your client's estate. Second, even if the estate is examined, it is not the job of the auditing attorney to tell you that you failed to utilize a treaty. Utilization of a treaty is not mandatory. Therefore, if you file the 706NA utilizing the situs rules of section 2014, the IRS agent will merely agree with your situs depiction and not discuss the availability of the treaty.

If you feel that you are able to utilize one of the existing treaties, you are required to use a form 8833. In this form you explain which treaty you are using, why you feel it is applicable to your particular situation, and determine the treaty benefits of utilizing the treaty.

Over my 32 years as a senior attorney with the IRS in the international estate tax forum, I audited perhaps 1,800 to 2,000 706 NA's. Utilization of the treaty benefit was not frequent, and I recall situations where some estates could have benefited to the tune of roughly $1 million in tax savings.

Need Help Preparing Form 706 NA?

Estate Tax Problems Require

an Experienced Estate Tax Attorney

Contact the Tax Lawyers at
Marini & Associates, P.A.

for a FREE Tax Consultation Contact US at

www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243).

How to Win at the Independent Office of Appeal

Working effectively with the IRS Independent Office of Appeals is one of the most important skills a tax controversy practitioner can develop. Whether you are in a pre‑Tax Court administrative appeal or handling a post‑petition docketed case, your strategy at Appeals can dramatically change the outcome for your client.

Start With the Facts, Law, and Posture

Appeals only gets involved after there is an actual controversy – usually following an examination and proposed adjustments, or in a docketed Tax Court case where the judge has encouraged or ordered the parties to try to resolve the dispute administratively. In either situation, the starting point is a command of both the facts and the law.

Before you ever speak with an Appeals officer, dissect the revenue agent’s report, identify each adjustment, and map the legal theories supporting and opposing each one. The burden of proof sits on the taxpayer for most issues, so walking into Appeals without a granular understanding of your evidentiary strengths and weaknesses leaves your client exposed to paying more than necessary simply because you were not ready to substantiate a position. Do not assume the Appeals officer “knows the law” on your issue; they see an enormous range of cases and will rely heavily on how clearly you present governing Code sections, regulations, and key authorities.

Build the Right Record and Documentation

Appeals is still part of the IRS, but it is a different audience than Exam. Appeals officers review a closed exam file and then evaluate whether the proposed assessment should stand, be reduced, or sometimes be increased. Your job is to supply the missing context and evidence that shows why the IRS’s adjustments are overstated or unsustainable.

That means coming in with a complete documentation package organized around the issues, not around your client’s bookkeeping system. If the case is about substantiation, you should know exactly which deductions can be proved and which cannot; if only partial documentation exists, calibrate expectations and settlement strategy accordingly. If the core dispute is legal rather than factual—for example, substance‑over‑form or characterization issues—ask candidly whether Appeals is the right forum, or whether you are simply previewing a case that truly needs judicial resolution.

Frame a Persuasive, Straightforward Protest

In most exam cases, your entry ticket to Appeals is a written protest responding to a 30‑day letter. For disputes over $25,000, a formal protest is required and must include: a statement that you want to appeal, identification of the tax periods, a list of each proposed item you disagree with, the facts supporting your position, and the law or authority that backs each argument. Smaller cases may qualify for “small case” procedures or Form 12203, but the discipline of a well‑structured protest is still valuable.

Use the protest to tell a clean story: start with a fact‑based explanation of why the taxpayer is entitled to the result sought, and then layer in the legal analysis. Avoid protests that read like indictments of the revenue agent. Appeals officers are far more receptive to a coherent narrative tying evidence to legal standards than to pages of rhetoric about what Exam “got wrong.”

Use FOIA and the Administrative File Strategically

Knowing what the IRS knows is critical. The taxpayer is entitled to request the administrative file, including exam workpapers, through a Freedom of Information Act (FOIA) request, which the IRS processes under its FOIA guidelines. A well‑timed FOIA request can reveal how the revenue agent built the case, what internal memoranda say about hazards of litigation, and whether there are gaps in the government’s proof.

FOIA requests should reasonably describe the records sought, identify the tax years and issues, and be sent in writing to the appropriate IRS FOIA office as outlined in the Service’s FOIA guide. Expect processing to take weeks or longer; build that lag time into your Appeals preparation calendar and follow up if responses stall.

Focus on Hazards of Litigation, Not Just “Right vs. Wrong”

Appeals’ statutory mission is to resolve tax controversies without litigation, fairly and impartially, while promoting consistent application of the tax laws. A key difference from Exam is that Appeals officers are required to consider “hazards of litigation” when evaluating settlement—the realistic risk that either side might lose, in whole or in part, if the case went to court.

Translate your trial instincts into settlement percentages: identify evidentiary gaps, adverse precedents, conflicting IRS positions, and credibility issues that would matter to a judge, then express those as litigation hazards. The Taxpayer Advocate Service explains that a hazards‑of‑litigation settlement is typically expressed as a percentage allocation of the issue and memorialized on a closing agreement or Form 870‑type waiver, which then forecloses later litigation on that issue. Appeals officers have greater flexibility than Exam because they can weigh these hazards; your presentation should invite them to use that flexibility.

Maintain Professionalism and Credibility

Appeals is not the forum to vent about Exam conduct or IRS frustrations. The IRS’s own guidance and practitioner experience stress that Appeals is intended as an impartial platform; undermining that tone by attacking prior IRS personnel rarely helps and can hurt your client’s credibility. Point out material errors clearly and firmly, but avoid ad hominem criticism.

Credibility is currency at Appeals. Address negative facts and adverse authority head‑on rather than pretending they do not exist. Acknowledge weak spots, explain why they do not control the outcome, and distinguish unfavorable cases where possible. Overstating the strength of your case—or ignoring obvious hazards—signals to the Appeals officer that you are not a reliable narrator and can cause them to discount your entire presentation.

Know the Mechanics: Deadlines, Forms, and Process

From a procedural standpoint, the appeals process is straightforward but unforgiving on deadlines. After an unagreed exam, failing to sign the exam report normally triggers a 30‑day letter outlining appeal rights; the taxpayer generally has 30 days from that letter to file a protest or small case request. Publication 5 explains the required protest elements and also describes when small case procedures or alternative dispute resolution programs may apply.

For disputes under certain thresholds, taxpayers can often use Form 12203, Request for Appeals Review, instead of a full formal protest, listing the items in dispute and reasons for disagreement. Once Appeals receives the case, it aims to resolve disputes without litigation, but interest and penalties continue to accrue until final resolution, and certain settlements will be documented on waiver forms (for example, Form 870 or 870‑AD) that limit the taxpayer’s ability to go to Tax Court later.

Bringing It All Together for Your Practice

For practitioners, success at the IRS Independent Office of Appeals comes from treating it as a quasi‑litigation forum with its own rules of engagement: master the facts and law, control the documentary record, craft a protest that reads like a trial brief distilled for a busy non‑judge, and frame every argument through the lens of realistic litigation hazards. When done well, Appeals can transform an ugly exam result into a reasonable settlement and spare your client the cost and uncertainty of court.

If you or your clients have received an unfavorable IRS audit report or a notice of deficiency and are considering an appeal, experienced representation can make the difference between simply relitigating Exam’s position and achieving a negotiated, hazards‑based resolution that truly reflects the strengths and weaknesses of the case.

Have an IRS Tax Problem?