Labor broker sentenced to 18 months in prison for tax evasion

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United States Attorney for the Western District of Wisconsin Timothy O’Shea on Thursday announced drywall business owner Gustavo Reyes was sentenced by a judge to 18 months in prison for tax evasion. This is believed to be the first prosecution for construction payroll fraud in Wisconsin, however construction industry officials said Reyes still owes millions in unpaid taxes and insurance premiums.

Reyes, 52, was also sentenced to two years of probation and owes more than $557,000 in unpaid taxes, according to state and construction industry officials. The Construction Business Group identified him as a labor broker who allegedly still owes $2.3 million for 20 separate liens since 2015 for failing to pay state taxes and unemployment insurance premiums. Reyes pleaded guilty to his charges on May 24.

Between 2013 and 2020, Reyes owned and operated a drywall business in Dane County, officials said. In 2015, the Internal Revenue Service started a civil audit of Reyes’ income tax returns for 2013 and 2014 and found he had significantly underreported his income for those years. Between 2015 and 2019, IRS agents sent multiple notices to Reyes for deficient tax assessments for 2013 and 2014, but he didn’t respond.

U.S. District Judge William Conley, who issued the sentencing, praised the IRS for “remarkable efforts” to handle tax evasion as a civil matter. The judge added Reyes made a bad situation with the agency worse when he “doubled down” and used others as proxies to create fictitious companies to avoid liens and levies.

Between 2018 and 2020, Reyes worked with others to create five entities in Dane County, most of which are dissolved, such as Royal LLC, American Drywall and Morales Construction, officials said. He tried to halt IRS collection for five tax years by operating his business through nominee entities. He also avoided IRS liens and levies by operating in large amounts of cash that he received from cashing checks at different establishments around the Madison area, officials added.

Construction industry officials applauded the federal prosecution, but officials urged contractors, project owners and the state to investigate or prosecute those who commit payroll fraud.

Robb Kahl, executive director of the Construction Business Group, said this is the first prosecution of a labor broker for payroll fraud the organization is aware of and hoped the state government would prosecute Reyes for the more than $2 million he allegedly still owes.

“When they practice this business model of misclassification they’re avoiding many areas of state and federal law which accumulate to large pricetags,” Kahl added.

The conviction will act a “red flag” for contractors who work with labor brokers whose numbers run extremely low, Kahl said. “We hope this sends a warning to everybody,” he added.

Payroll fraud happens when workers who are supposed to be classified as full-time employees are treated as independent contractors or off-the-books workers, construction business officials explained. Cash payments are typical for off-the-books workers who are often victims of wage theft, officials added.

Terry McGowan, president and business manager of International Union of Operating Engineers Local 139, said labor brokers who pay in cash drain taxpayers when they fail to pay taxes, remit unemployment insurance payments and fail to claim all their employees on worker’s compensation insurance policy. He thanked the U.S. Attorney and added he hoped Wisconsin prosecutors would also pursue employers who engage in payroll fraud.

“These are not victimless crimes. Workers are exploited by being underpaid and deprived of basic employee benefits. Taxpayers foot the bill when tax fraud occurs. And honest employers pay more in unemployment insurance taxes and workers’ compensation premiums when others cheat the system. Criminal prosecution is likely the only deterrent that will curb payroll fraud in the construction industry,” McGowan added.

Emily Pritzkow, executive director of the Wisconsin Building Trades Council, said the sentencing underscores “critical importance” of collaboration between labor, industry and law enforcement when upholding principles of a responsible construction sector.

“This outcome demonstrates the impact of collective efforts to expose and eliminate exploitative practices that undermine the well-being of workers and the credibility of our industry. The consequences of misclassification and payroll fraud ripple beyond immediate financial losses, affecting tax compliance, insurance credibility and worker safety,” Pritzkow added.

The IRS Criminal Investigation team and the Wisconsin Department of Workforce Development conducted the investigation, federal officials said.