Former Stillwater Mayor Ken Harycki pleaded guilty today in federal court to conspiracy to defraud the United States by preparing and filing tax forms that he knew to be fraudulent.
Harycki, 51, entered his plea before U.S. District Judge Ann D. Montgomery in Minneapolis.
“As a former mayor, Mr. Harycki understands, better than most, the magnitude and impact of the fraud he helped to perpetrate,” U.S. Attorney Andrew Luger said in a news release. “By his guilty plea, Mr. Harycki has taken responsibility for his actions, but that does not excuse his criminal acts. This defendant not only violated his accounting license by covering up a tax fraud, he eroded the trust of the residents of Stillwater, who elected him to a position of high public office.”
Harycki will serve between three and four years in prison and will pay fines of between $3,000 and $30,000, according to the plea agreement. Harycki agreed to pay restitution in an amount yet to be determined by the court.
A sentencing date has not yet been set.
According to his guilty plea, during the course of the conspiracy:
Harycki owned and operated Customized Payroll Solution, which provided bookkeeping, payroll, and accounting services, including tax-related services, to clients.
In 2007, Harycki began providing services to Thurlee Belfrey and his brother, Roylee, both have been separately charged with fraud. Within the first few payroll cycles for Model Health Care, a company controlled by the Belfrey brothers, Harcki concluded that while payroll taxes were being withheld from the wages of employees, those taxes were not being paid over to the government.
Harycki learned that the Belfrey brothers had directed that the withheld taxes not be paid to the government, and instead, the taxes would be used for other purposes, including compensating themselves and their family members, as well as funding other businesses operated by the co-conspirators.
According to Harycki’s guilty plea:
On Feb. 18, 2010, Harycki created the entity MKH Holdings, Inc., to assume control over bank accounts used to fund businesses operated by the Belfrey brothers.
MKH Holdings Inc., was used to cause funds falsely reported on income tax returns to be paid to the Belfrey brothers and others. During the course of the conspiracy, Harycki also incorporated other businesses, obtained employer identification numbers, paid for personal expenses, filed false tax returns, and opened and used numerous bank accounts for the benefit of the Belfrey brothers in order to avoid payment of taxes.
The tax loss from the defendant’s relevant conduct is between $1 million and $2.5 million.
This case was investigated by the Internal Revenue Service – Criminal Investigation Division, Federal Bureau of Investigation, and Department of Health and Human Services Office of the Inspector General.
This case is being prosecuted by Assistant U.S. Attorney Robert Lewis.
Harycki’s first appearance, arraignment and plea hearing is at 9 a.m. Thursday, Jan. 15 in U.S. District Court in Minneapolis. Harycki faces charges of fraudulent accounting that allegedly helped conceal more than $10 million in tax liabilities for a Twin Cities area health care business.
A plea agreement has been reached, according to the Pioneer Press. Details will be made later today.
According to Minnesota Public Radio, sentencing guidelines call for 36 to 42 months in prison; however, Harycki’s attorney says the former mayor has been cooperating with the government and may receive a lesser sentence.
Harycki, 51, the owner of Customized Payroll Solutions in Stillwater, was charged last month by the U.S. Attorney’s Office with conspiracy to defraud the federal government of millions of dollars by preparing and filing tax forms he knew to be fraudulent.
Thurlee Belfrey and his brother, Roylee, were each indicted on Medicaid fraud charges on last month. The two men own and manage multiple health care businesses, including Royal Health Care, Model Health Care and Integrated Health Services, Inc.
According to federal sentencing guidelines, if Harycki is convicted he could face up to five years in federal prison, and up to a $250,000 fine.
According to court documents:
Harycki began doing accounting work for the Belfreys and their companies in 2007, and he came under an IRS investigation in October 2012. Harycki allegedly hid the fraud by using numerous bank accounts, making numerous money transfers per day between the bank accounts and creating business bank accounts in other people’s names.
Harycki also allegedly created shell companies for the Belfreys and filed false tax returns on their behalf.
“These defendants are charged with conspiring to obtain significant amounts of money from the United States by fraud,” U.S. Attorney Andrew Luger said in a news release. “When individuals steal from government agencies like Medicaid, they are effectively taking money from us all to line their own pockets. It is critically important that law enforcement actively investigate and prosecute healthcare fraud.”
Harycki regularly prepared Model’s IRS quarterly Form 941, which reports an employer’s payroll and FICA tax liabilities to the IRS, according to the U.S. Attorney’s Office. Harycki knew that the Belfreys were deducting and collecting payroll taxes from their employees, but not paying those funds to the government. Harycki made no attempt to correct the forms, and instead fabricated entries onto the forms to match other records and assist the Belfreys to avoid detection by the government.
On Feb. 18, 2010, Harycki allegedly created the entity MKH Holdings, Inc., to assume control over bank accounts used to fund Model and other businesses operated by the Belfreys. MKH Holdings was used to cause funds not accurately reported on income tax returns to be paid to the Belfreys and others. During the course of the conspiracy, Harycki also incorporated other businesses, obtained employer identification numbers, paid for personal expenses, and opened and used numerous bank accounts for the benefit of the Belfreys in order to avoid payment of taxes.
“The Special Agents of IRS Criminal Investigation are committed to protecting the integrity of our system of taxation by investigating tax and accounting professionals who conspire with others to violate the tax laws,” IRS Special Agent in Charge Shea Jones said. “All tax professionals, including CPA Kenneth Harycki, have a duty to their clients to prepare accurate and complete tax returns that comply with the law.”
In November, Harycki resigned as mayor to “better focus on personal issues.”
Harycki was first elected mayor in 2006, and was re-elected in 2010. He chose not to seek re-election this fall.
Harycki came under fire after federal agents raided business last March.
Agents with IRS Criminal Investigations, in conjunction with the FBI and U.S. Department of Health and Human Services conducted the raid at Harycki’s Stillwater business, Customized Payroll Solutions, as part of an “enforcement action,” Special Agent with the IRS criminal investigations unit Vicki Petricka has said.
“The issue that is being investigated involves a former client of Customized Payroll Solutions,” Harycki said in a prepared statement after the raid last March. “I am deeply disappointed by this situation and we are fully cooperating with authorities.”
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