If a Co‑Owner Is Convicted of Tax Crimes: Steps to Protect Your Business and Its Tax Position

When a Co‑Owner Is Convicted of Tax Crimes: Immediate Steps to Protect Your Business and Tax Position

Hook: If a partner or co‑owner has just been convicted of tax crimes, your business faces immediate legal, tax, and operational risks: restitution liens, IRS levies, damaged banking relationships, and heightened audit exposure. This article uses the January 2026 sentencing of a Rhode Island public adjuster to lay out a practical, prioritized contingency plan you can implement within 30, 90, and 365 days to protect your company, its tax posture, and the remaining owners’ personal exposure.

The recent Rhode Island case — why it matters to your business

In January 2026 U.S. Attorney Charles Calenda announced that William N. L’Europa, who ran public adjuster and property restoration businesses, was sentenced to two years’ probation and ordered to pay $1,367,336.08 in restitution to the IRS for unpaid federal taxes covering 2007–2013. L’Europa had earlier been convicted in 2012 alongside a business partner for underreporting nearly $1.8 million in receipts.

That case crystallizes a pattern we see more often now: partner misconduct that spans years, creates substantial tax liabilities, and triggers both criminal and civil fallout for businesses that may be nominally separate from the co‑owner’s personal liabilities. For remaining owners, the immediate questions are: How do I stop the bleeding? How do we avoid being pulled into an audit or civil claims? And how do we preserve business continuity?

High‑priority actions in the first 48–72 hours

Time matters. Begin with containment to prevent operational disruption and further tax exposure.

• Secure financial controls: Immediately revoke any signatory authorities held solely by the convicted co‑owner—bank accounts, merchant accounts, payroll access, and tax e‑file credentials. Require two‑person approval for transfers above a material threshold.
• Engage counsel and a forensic accountant: Retain a criminal defense‑aware business attorney and a forensic CPA who can quickly map liabilities, identify diverted funds, and preserve documents for both tax defense and civil recovery.
• Preserve records: Image hard drives, back up accounting software, and secure physical documents. Document chain of custody. Courts and the IRS expect rigor—poor preservation undermines your defense.
• Check for notices and liens: Search public records for federal tax liens and levies. If the convicted partner handled payroll or payroll tax deposits, check the business’s payroll tax history immediately.
• Notify your bank and insurers: Inform your primary bank relationship manager and your insurer (D&O, fidelity bond, general liability) to start a claim assessment and to request holds or alerts on suspicious activity.

30–90 day plan: stabilize, document, and limit liability

With immediate containment underway, execute a short‑term stabilization plan to protect cash flow, tax positions, and operations.

1. Conduct a tax risk audit

Work with a CPA to run a tax risk audit covering the years most likely affected. Key tasks:

• Reconcile reported revenues to bank deposits and general ledgers.
• Identify unreported or misclassified income, missing 1099s, or improper expense claims.
• Check payroll tax deposits and Form 941/940 filings for accuracy and timeliness.

2. File protective and corrective returns

If the LLC or partnership returns understate income or omit material items, discuss options with counsel and your CPA for corrective filings. There may be strategic value in filing amended returns before an IRS audit starts—especially where the business can claim cooperative disclosure and negotiate penalties. Never file without legal and tax advice.

3. Restrict or restructure operational roles

Temporarily reassign the convicted owner’s operational responsibilities. If probationary conditions or restitution orders prevent active participation (as occurred in the Rhode Island case), formalize the removal or suspension in meeting minutes and employment documents to establish clean governance.

4. Communicate with key stakeholders

Prepare a measured communication plan for employees, major clients, lenders, and vendors. Be factual: emphasize continuity plans and the steps taken to secure finances. Over‑communicating avoids surprise and preserves relationships.

90–365 day plan: civil remedies, restructuring, and contracts

With the immediate crisis mitigated, focus on recovery: reclaiming losses, reconfiguring the ownership structure, and hardening the business against future partner misconduct.

Pursue indemnification and civil recovery

Many operating agreements contain indemnification clauses; if yours does, start enforcing them. Steps include:

• Demand indemnification for corporate taxes, penalties, interest, and legal fees linked to the co‑owner’s misconduct.
• File a civil suit against the co‑owner for breach of fiduciary duty, fraud, or conversion if internal recovery or insurance does not cover losses.
• Leverage criminal restitution orders—coordinate with the U.S. Attorney’s office to ensure business claims are considered in restitution proceedings.

Restructure ownership and governance

Consider structural changes that limit future exposure:

• Revise or adopt buy‑sell provisions with clear criminal conviction triggers and funding mechanisms such as life or key‑person insurance, escrow, or third‑party valuation formulas.
• Convert entity type where appropriate. For example, carefully weigh the benefits of an S‑Corp vs. a manager‑managed LLC vs. a C‑Corp in insulating innocent owners—each has distinct tax and liability implications.
• Adopt tighter corporate formalities such as independent board review of related‑party transactions and mandatory periodic audits by external accountants.

Create or strengthen indemnity agreements

Draft robust indemnity language that covers:

• Tax liabilities arising from partner misconduct, including penalties and interest.
• Costs of defense, forensic accounting, and IRS negotiation.
• Security mechanisms: escrowed funds, personal guaranties, or pledged assets to secure indemnity obligations.

Sample trigger clause (high level): “A co‑owner convicted of a felony involving fraud, tax evasion, or embezzlement shall be deemed to have breached material obligations and the remaining owners shall have the right to compel transfer of the convicted owner’s ownership interest at a predetermined valuation mechanism, with indemnification for all taxes, penalties and legal costs attributable to the misconduct.”

Tax filing safeguards and audit readiness

Preventing future tax exposure requires operational and documentation discipline.

Accounting and internal controls

• Segregate duties: One person should not control billing, collections, bank reconciliations, and payroll.
• Dual signatories: Require two signatures for checks and transfers above a set amount.
• External reviews: Budget for quarterly or semiannual reviews by an independent CPA, and consider an annual SOC or internal control attestation for larger firms.
• Automation and audit trails: Use accounting platforms with immutable audit trails and role‑based permissions; 2026 IRS analytics increasingly flag unexplained discrepancies found by machine learning.

Tax compliance and documentation

• Keep meticulous supporting documentation for deductions, contractor payments, and credits.
• Document any internal investigations—timelines, findings, and remedial steps. This can be persuasive with auditors and prosecutors when demonstrating the company’s non‑involvement.
• Use signed engagement letters with tax preparers that specifically allocate responsibilities for tax positions and disclosure of irregularities.

Partnership‑specific safeguards

If you operate as a partnership or multi‑member LLC, be aware of the centralized partnership audit regime (CPAR) implications: in an audit, the partnership can be assessed for adjustments for the reviewed year unless an electing small partnership or a push‑out election applies. Take steps to:

• Keep partner capital account details and K‑1 support in good order to resist imputed underpayment assessments.
• Include tax indemnity and reimbursement clauses in the operating agreement for wrongful conduct that causes partnership adjustments.

Insurance, bonds, and other protection mechanisms

Insurance and financial instruments can absorb some of the shocks from partner misconduct.

• Fidelity bonds and employee dishonesty coverage: These can cover direct losses from fraud by a partner who acts in an operational role.
• D&O insurance: Insurers often cover defense costs for shareholder derivative claims arising from alleged mismanagement.
• Key‑person and buy‑sell funding: Use life or disability policies or escrowed working capital to fund buy‑outs triggered by criminal convictions.

How probation and restitution orders affect the business

Probation and court‑ordered restitution are primarily personal obligations, but they can have collateral business effects:

• Restitution liens: If restitution is unpaid, the government can pursue civil collection that may attach to personal assets and, in some cases, to business funds if the owner commingled assets.
• Probation restrictions: A convicted co‑owner may be barred from certain business activities or from access to financial systems, which may be an opportunity to formalize their suspension.
• Third‑party relationships: Lenders and insurers may re‑price or withdraw coverage when a key officer is convicted; proactively engaging them and showing remediation steps can reduce fallout.

2026 trends and why now is the moment to act

Recent enforcement trends through late 2025 and early 2026 make contingency planning essential:

• Heightened IRS enforcement and analytics: The IRS is using more AI and cross‑matching tools, increasing audit selection speed. Businesses with unexplained revenue variances face higher audit risk.
• Expanded information reporting: Reduced reporting thresholds and increased third‑party data (including for crypto and gig economy transactions) mean underreporting is more likely to be detected.
• Whistleblower program growth: Stronger incentives for whistleblowers make partner reporting more probable and costly.
• State‑federal coordination: States are sharing data and collaborating with federal agencies, which multiplies exposure across jurisdictions.

Given these trends, remaining owners who delay action risk larger assessments, harsher penalties, and reputational damage.

Checklist: What to do now (30‑, 90‑, 365‑day checkpoints)

1. Within 48 hours: Revoke signatory powers, secure records, engage counsel and a forensic CPA, and alert bank and insurer.
2. Within 30 days: Complete a tax risk audit, freeze suspicious vendor payments, and document governance changes in minutes or resolutions.
3. Within 90 days: File corrected returns if recommended, begin civil recovery and indemnity enforcement, and implement interim internal controls.
4. Within 180–365 days: Implement permanent governance and buy‑sell changes, finalize indemnification language, secure insurance, and consider entity restructuring.

When to involve the IRS or DOJ — and when to stay defensive

Transparency can be a double‑edged sword. There are situations where voluntary disclosure (or a preemptive amended return) reduces penalties and helps negotiate repayment terms; in other cases, silence and legal counsel are wiser.

Always coordinate with counsel before volunteering information to investigators. If the business can demonstrate prompt remediation, cooperation, and lack of complicity, the company often receives more favorable civil tax resolutions and less reputational harm.

Case study takeaway: Lessons from the Rhode Island sentencing

From the William N. L’Europa matter we draw several lessons:

• Longstanding partner misconduct can produce multi‑year tax exposure and restitution orders that exceed $1M—rapid containment and documentation are crucial.
• Prior convictions did not prevent recurrence—operational safeguards and enforceable buy‑sell triggers must be in place before trouble appears.
• Court‑ordered restitution and probation create both legal and operational constraints; proactive governance changes can preserve continuity and limit contagion to the business.

Final practical takeaways

• Act immediately: Remove financial access, secure records, and hire a forensic CPA and attorney within 72 hours.
• Document everything: Audit trails and formal minutes are your best defense in IRS and civil proceedings.
• Use indemnities and insurance: Update operating agreements with criminal conviction triggers and secure fidelity/D&O coverage.
• Plan for restructuring: Consider buy‑sell clauses, escrowed funds, or entity conversion to protect innocent owners.
• Stay future‑focused: 2026 enforcement and information reporting trends will expose historical gaps—remediate now to avoid larger future penalties.

Next steps: A practical engagement plan

If your business is facing partner misconduct or a co‑owner’s tax conviction, you don’t have to navigate this alone. We recommend a three‑step engagement:

1. Immediate triage call with legal and tax counsel (we can coordinate introductions).
2. Rapid forensic accounting engagement to quantify exposure and preserve evidence.
3. Draft and implement governance, indemnity, and restructuring actions tailored to your entity and industry.

Call to action: Protect your business now—contact our team at taxservices.biz for a contingency planning workshop and an audit readiness review. Get a custom 90‑day playbook that neutralizes present risks and positions your company for long‑term resilience.

Note: This article provides general information and is not legal or tax advice. Consult a qualified attorney and CPA to apply these strategies to your organization’s facts and jurisdictional rules.

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