CA Couple Plead Guilty to $2M Comp Premium and Tax Fraud

High worker’s compensation premiums are said to stifle many small businesses.  There are many acceptable ways to reduce workers compensation costs, but intentionally classifying employees in lower risk jobs to insure them at a lower rate is not one of them.  It is fraudulent, and it shifts the burden to the honest business owners who play by the rules.  One particular Orange County couple got away with the scam for eight years, but as of Monday, that ride is over.

According to the Orange County Register, the husband and wife, James Joseph Klinger, 64, and Dorothy Louise Klinger, 64, ran two gardening and tree-trimming businesses near San Juan Capistrano. They recently pleaded guilty to multiple felonies for their involvement in a $2 million tax and insurance fraud scam.

Mr. and Mrs. Klinger pled guilty on November 7th to 29 counts of misrepresenting facts to the State Compensation Insurance Fund, 28 counts of failing to file a return with the intent to evade tax, 28 counts of willful failure to pay taxes, five felony counts of misrepresenting facts to a workers’ compensation insurance company and sentencing enhancements for loss over $100,000 and taking involving more than $500,000.

In addition, Joseph Klinger also pled guilty to 11 felony counts each of filing false tax returns and willful failure to file or make fraudulent tax returns, while Dorothy Klinger pled guilty to 7 felony counts each of filing false tax returns and willful failure to file or make fraudulent tax returns.

Both were placed on ten years probation and ordered to pay $3.4 million in restitution to cover the costs of a $2 million in fraud plus penalties and interest.

If the terms of their probation are ever violated, they will be ordered to serve five years in prison.

Since the 1970’s The Klingers have co-owned and operated Modern Tree Service, Inc. and Jamo’s Gardening. According to prosecutors, they set up Jamo’s Gardening with the purpose of hiding Modern Tree Service, Inc. employees’ payroll between 2003 and 2010.

Prosecutors state that they also fraudulently classified Jamo’s Gardening as a landscape gardening business rather than a tree-trimming business, which would allow them to insure tree-trimmers as gardeners at a substantially lower insurance premium. Due to the increased risks of a tree-trimming job, the insurance premium for tree-trimmers is much higher than that of a gardener.

The Klingers also apparently kept two sets of books: one set showing the actual income and payroll expenses for each company and the other showing an edited version, which they used to under-report income and wages to the state and to insurance companies.

In July of 2009, the State Compensation Insurance Fund audited one of the businesses and found large amounts of money were transferred from Modern Tree Service, Inc. to Jamo’s Gardening and used to pay for payroll and expenses, prosecutors said.

Prosecutors also noted that a subsequent investigation uncovered the tax fraud.