Ocean City Franchise Holder Failed To File Taxes

BALTIMORE -- Owing $296,701 to the government over a period of several years, Ocean City franchise holder Patrick McLaughlin pleaded guilty last Thursday to failing to file individual income tax returns in 2009 and one count of failing to report employment tax withholdings in 2007.

The plea agreement was announced by United States Attorney for the District of Maryland Rod J. Rosenstein and Acting Special Agent in Charge Eric C. Hylton of the Internal Revenue Service - Criminal Investigation, Washington, D.C. Field Office.

"The IRS-Criminal Investigation Division takes these violations of law very seriously," said Eric Hylton, Acting IRS Special Agent in Charge. "Paying taxes is a solemn obligation of citizenship and those who blatantly fail to file and pay their taxes undermine our democracy."

At the time he evaded filing taxes, McLaughlin, 43, operated several concession businesses. He was awarded exclusive franchises after a competitive bid process. At that time, his companies were Sunbeach Studios, Ltd. and United Beach Photo, Inc., which were in the business of photographing beach tourists; Arctic Inventions, Ltd., which operated a fleet of retail ice cream trucks; and 85 N Sunny, which was in the business of renting beach equipment to summer tourists.

Currently, according to City Clerk Kelly Allmond, is the franchise holder for more than 30 beach equipment franchises (beach stands) and maintains the franchise for both beach photo operations (scopes).

Speculation has been swirling around McLaughlin for the last several months. Back in December, IRS agents were seen in Ocean City at the Telescope Pictures location on 16th Street and were reportedly seizing computers and documents.

According to the plea agreement, released yesterday, McLaughlin failed to file corporate tax returns for Sunbeach, Arctic and United for tax years 2003 to 2009. The total income tax liability that McLaughlin avoided by not filing corporate returns for United from 2007 to 2009 is $10,239.

McLaughlin also did not file individual income federal tax returns for tax years 2005 to 2009, thus failing to report his personal income from his businesses and failing to pay federal income tax of a total of $151,114. In December of 2010, McLaughlin was notified by IRS agents that he was under criminal investigation. McLaughlin submitted corporate and individual income tax returns for the missing years thereafter.

In addition to failing to file corporate and individual tax returns, McLaughlin also failed to report and remit Social Security and Medicare taxes (employment taxes) withheld from his employees’ wages, resulting in a total employment tax loss to the government of $135,348.46.

For example, during 2006, McLaughlin and Sunbeach withheld $10,292.94 in employment taxes from Sunbeach employees, and made a one-time tax payment to the IRS of $15,000. McLaughlin had a duty to report these withholdings, remit a total of $20,585.88, and file a Form 941 at the end of each fiscal quarter of 2006. McLaughlin’s failure to file Forms 941 for Sunbeach for each quarter and to remit the full amount due resulted in a tax loss to the government of $5,585.88.

Similarly, during 2007, McLaughlin and United withheld $29,381.49 in employment taxes from the United employees. McLaughlin failed to report these withholdings, and to withhold an additional $14,355.66 in matching funds, resulting in a tax loss to the government of $87,474.31.

Finally, during 2007 and 2008, McLaughlin and 85NS withheld $8,839.58 and at least $12,419.56 respectively in employment taxes from the employees. McLaughlin failed to report these withholdings, and to pay over an additional $21,259.14. McLaughlin made only a one-time employment tax payment of $230, resulting in a tax loss to the government of $42,288.27.

As a result of McLaughlin’s failure to pay corporate, individual and employment taxes, the total tax loss to the government is $296,701.46.

McLaughlin faces a maximum sentence of one year in prison and a $100,000 fine for failing to file individual income tax returns in 2009, and for failing to report employment tax withholdings U.S. District Judge Catherine C. Blake scheduled sentencing for Oct. 5, 2012.

At the sentencing is when it will be determined what sort of restitution McLaughlin will have to make to the government. There is precedent that McLaughlin will most likely not serve any time in favor of a hefty fine and a detailed plan to make restitution.

“By pleading guilty, the Defendant may face collateral consequences as a result of his conviction,” the plea agreement outlined by Rosenstein reads. “ … the Court will impose as a condition of probation or supervised release a restitution award of $296,701.46, less any payments referenced herein and any additional payments received and accepted by, or credits granted by, the IRS by the date of sentencing. The Defendant understands that the IRS is authorized to and may use the restitution order as the basis for a civil assessment.”