The Tax Times: $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.

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