300 Employees of O.C. Firm Targeted by IRS

In one of the biggest tax cases involving employees at a single company, the IRS is seeking back taxes and hefty penalties from more than 300 employees at computer distribution giant Ingram Micro Inc. for failing to report bonuses as income.

The agency has targeted 200 salespeople at Ingram’s Santa Ana headquarters for civil action, said Michael S. Kochmanski, regional chief for criminal investigations.

Internal Revenue Service examiners also found that more than 100 salespeople at the company’s East Coast facility in Buffalo, N.Y., had failed to report bonuses, the agency said.

“By the sheer volume of people involved, I’ve never seen one with this many individuals from one company,” said Kochmanski, a 23-year veteran with the IRS.

The unreported income per case ranged from about $1,000 to $220,000. The agency targeted the worst offenders--17 so far--for criminal prosecution and is proceeding against the rest in civil actions.

Four employees in Santa Ana and 12 in Buffalo have pleaded guilty to tax evasion or filing false income tax returns. One case in Santa Ana is pending, and prosecutors say that several more employees Orange County are expected to be charged.

The cases focus on payments that manufacturers in various industries make to salespeople as part of product promotions. The bonuses are commonly called SPIFFs--special product incentive fund.

Ingram’s sales force, for instance, would earn such incentives from Microsoft or Texas Instruments for placing orders for certain products with retail outlets such as CompUSA, Kochmanski said. Employees could get, say, $5 for each product sold. Manufacturers would pay Ingram, which in turn would pay the employees.

Manufacturers typically must file an IRS Form 1099 listing payments totaling more than $600 to one person, Kochmanski said. And workers who receive copies of those forms typically report the amounts listed as income.

But Ingram Micro, the world’s largest distributor of computer products, was an unusual case, Kochmanski said.

The company operates in 19 countries and distributes more than 36,000 products to more than 100,000 resellers. Hundreds of manufacturers were paying incentives that never approached $600 to any one employee.

But the total payments that employees were receiving from so many manufacturers amounted to thousands of dollars in many cases, the agent said.

“We had situations where someone would get $60,000 in SPIFFs and never received any 1099s,” Kochmanski said. “In other cases, they might get [tax forms] for $20,000 but not the rest.”

The IRS hasn’t found any improper actions by Ingram Micro or the manufacturers, he said.

Some employees in Buffalo simply noticed that they hadn’t received tax forms for the special incentives and decided not to report the income, he said. Word soon got around, and most of the sales staff began doing the same thing, he said.

“One or more salespeople went to an accountant, who told them they have to report the SPIFFs,” Kochmanski said. “But there was so much talk around the office about people not paying it that the accountant brought it up to the IRS.”

Since early 1995, the agency has audited returns of nearly 400 sales employees in Santa Ana and about 150 in Buffalo, he said.

The total amount of taxes that weren’t paid from 1990 to 1994 isn’t known because the agency is still computing the figure, But just those who were prosecuted owed hundreds of thousands of dollars.

David Evans, 33, of Buffalo, for instance, admitted that he failed to report $220,000 in incentive payments. Had he reported the income, he would have paid $63,000 in taxes. Instead, he recently paid $167,100 in back taxes, interest and penalties.

Evans was sentenced Wednesday to four years’ probation, fined $5,000, confined to his home for seven months and ordered to perform 1,000 hours of community service.

Since the agency launched the investigation in February 1995, a number of employees have filed amended returns, paying back taxes, penalties and interest. However, the agency may still seek fraud penalties--75% of the amount owed, Kochmanski said.

“The company, apparently, got the word out quickly,” he said.

Ingram’s lawyer in Buffalo, Daniel Oliverio, said the company’s role in acting as a conduit for the manufacturers’ incentives was “perfectly legitimate.”

Under agreements with manufacturers, Oliverio said, the manufacturers, not Ingram, were to issue income tax forms to the employees and the IRS to record the payments. But often no forms were issued, and those prosecuted in Buffalo have admitted in court that they took advantage of that lapse.

Several employees’ attorneys contend, however, that Ingram should bear some responsibility.

“Whether the money came from vendors or not, the company paid the salespeople. It cut the check,” said James Kamman of Santa Ana, a lawyer for one of the defendants. “I don’t think there is any question the company had a reporting requirement at that point.”

Kamman said his client never received a 1099 form and never saw the amounts show up on his annual W-2 earnings statements.

Russell P. Briesacker Jr. of Anaheim, who represents another employee, agreed. The government, he said, is painting the employees with the same broad brush when each case is different.

“It’s not a black-and-white situation at all,” Briesacker said.

Both lawyers said they were upset that the government took on the “little people” and not the companies, which can be subjected to stiff fines for failing to file 1099 forms.

After the investigation began, the company started to deduct withholding and other taxes from the incentive payments to sales employees.

“It was just a policy decision to change the way we handle SPIFFs internally,” Oliverio said. “We could handle it either way.”