For two years, Parkway Crossing developer Heath Johnston outsourced his company’s payroll services to Provident Management Group of American Fork without any known problems.

Then one day, Johnston got a solicitation call from another payroll services company, Payday Resources. Payday told him some of Provident’s clients had switched over supposedly because the American Fork company wasn’t paying their withheld payroll taxes to the IRS.

“We investigated what Payday told us. By the time we fired Provident in July 2002, we found out about $50,000 in state and federal taxes we had paid to Provident hadn’t been paid to the IRS,” said Jennifer Browning, Johnston’s assistant and office manager of Summit Development and Management LLC of Orem.

On Thursday, a federal grand jury returned a 45-count criminal indictment against three executives of the now defunct Provident. The indictment alleged conspiracy, aiding and abetting, mail fraud and failure to pay withheld tax monies.

Charged are Douglas Morby of Ogden, and two Mesa, Ariz., men, Scott Boley and Robert Langford. Morby, 49, was Provident’s CEO, while Boley, 46, was president and Langford, 54, was chief operating officer. Each count of the indictment carries a potential maximum penalty of up to five years in prison and a $250,000 fine.

The company was accused in the federal indictment of collecting more than $4.6 million in federal, state and local taxes from more than 400 small businesses nationwide, including 150 from Utah County, and misappropriating the funds for unauthorized personal and business expenses.

The alleged fraud occurred between June 30, 2001, and Feb. 1, 2003. Founded in September 2000, Provident had operated in American Fork, Provo, Salt Lake City and Mesa, Ariz.

“The monies that were diverted didn’t include payments to Provident to pay workmen’s compensation and 401(k) obligations,” said Melodie Rydalch, spokeswoman for the U.S. Department of Justice.

In April 2003, Provident, which had also operated as Zephyr Trust, Omega Resources and Timpview Marketing Trust, was shut down by the Justice Department. According to a civil lawsuit filed by the Justice Department in federal court in Salt Lake City, the company failed to file at least 282 federal employment tax returns for its customers and diverted more than $2 million in collected taxes to their own use.

Rebecca Hyde, Morby’s attorney, said he and Boley voluntarily agreed to a civil judgment in November 2005 and pledged “considerable assets to paying back taxes to the IRS on behalf of the 282 creditors in the civil case.”

“They sold an unrelated business for $5 million and applied those proceeds to paying the 282 customers,” Hyde said. “It’s easy for people to walk away from their obligations, especially in situations like these. But Doug has made tremendous effort to rectify the situation.”

Hyde said Morby plans to plead “not guilty” to Thursday’s criminal indictment charges. “But he’s not going to walk away from obligations that may have been excluded in the 2005 civil judgment.”

Attorneys for Langford could not be immediately reached for comment.

According to Thursday’s indictment, the defendants allegedly duped their clients into thinking withholding taxes had been paid by delivering to them regular invoices and employers’ quarterly federal tax returns that had never actually been filed.

To prevent their clients from finding out their withholding taxes had been diverted, the defendants listed Provident’s address on the tax returns rather than their customers’ addresses. As a result, the IRS mailed notices of tax delinquencies to Provident instead of to the customers.

“We had no reason to suspect them. We never got any IRS notices,” Parkway Crossing’s Browning said. “For a year, Provident kept telling us they’d take care of the problem. But we’d probably never see any of that money again.”

Summit Development ended up paying $100,000 in payroll taxes for the tax period between the second half of 2001 to the first half of 2002, she said.

Summit was one of the luckier ones compared with several of the 400 small businesses nationwide that fell victim to Provident’s tax scam. U.S. Attorney Brent Tolman said an unspecified number of them went out of business because they had to pay taxes twice.

“Small businesses that employ payroll servicing companies need to be very cautious and vigilant,” Tolman said. “The duty to pay these taxes never transfers from the business to the payroll servicing company. Companies victimized by these schemes end up having to pay taxes twice, and for some small businesses, that double hit is more than the business can survive.”

This story appeared in The Daily Herald on page A1.

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