F

irst came notices in the mail from the state Department of Revenue to public and private entities on Cape Ann, demanding payment for thousands in income taxes.

Then came the knock on the door from state investigators asking questions about their payroll service provider, Boston Business Services of Gloucester, a small firm owned by local resident John R. Carr Jr.

Next came a flurry of lawsuits filed by 10 businesses and public entities, accusing Carr of misappropriating more than $700,000 in payroll taxes from 2011 to 2014.

The complaints allege Carr did not send to the state the full amount of payroll taxes owed by his clients. Instead, Carr allegedly kept some of the money he collected from them and used it for his own purposes.

Arnold Rosenfeld, a lawyer representing Carr, said his client is working to resolve the lawsuits. “We settled some of the cases,’’ Rosenfeld said. “And there are some that we haven’t been able to settle.’’

The situation has shaken the close-knit business community in Gloucester, where Carr has offered payroll services since 1980.

“The sense of betrayal is acute for a lot of folks,’’ said Meredith Fine, a Gloucester lawyer who represents Cape Ann Marina, which claimed more than $100,000 in losses.

“It’s incredibly disheartening for the community,’’ said Chris Costello, president of Timberline Inc., a construction materials firm that says it lost more than $32,000. “So many Gloucester businesses were affected by it.’’

Carr is still operating the business, Rosenfeld said. “I honestly don’t know how it happened,’’ he said of the missing money. “We’ve tried to figure it out and have been unable to do it.’’

Court papers state that “Carr and BBS currently are under investigation by the [Department of Revenue]’’ and say clients received summonses to provide the DOR’s Criminal Investigations Bureau with records of its dealings with the firm. Nicole St. Pierre, a DOR spokeswoman, declined to confirm or deny an investigation.

Carr provided his clients with financial statements showing the payroll taxes had been paid in full. They were not aware of the alleged fraud until they were contacted by state authorities, according to court papers.

“My client was stunned when the State Police showed up at his place of business,’’ said Donald R. Bumiller, who is representing Annisquam Yacht Club.

Under the law, employers are responsible for payroll taxes even if they may be victims of fraud. The yacht club scrambled to pay its unpaid bill, Bumiller said.

“My client is a pretty small operation,’’ Bumiller said. “They had given about $27,000 over to Mr. Carr to pay payroll taxes. He took it. . . . That’s very difficult.’’

Property records show that Carr sold his office at 91 Pleasant St. in downtown Gloucester last April for $186,000. The money was used to settle lawsuits filed by Cape Ann Marina and Timberline.

“I think all of it went to pay the claims,’’ Rosenfeld said. “He’s tried to pay back as much as he could.’’

Carr used equity in his Gloucester home to settle claims made by Cape Ann Transportation Authority, a public bus service, for about $23,000, and Day By Day Adult Care Inc., for about $21,000, according to court records.

Reached by phone at his home, Carr deferred questions to Rosenfeld. Carr has liens on his home that total more than $400,000, according to filings at the Southern Essex District Registry of Deeds. The largest is for $379,000 granted by a judge to the town of Essex last August, court records show.

In its claim, the town alleges Carr and his firm “wrongfully converted taxpayer funds to their own personal use.’’ Brendhan Zubricki, the Essex town manager, declined to comment, citing the town’s policy on litigation.

The claims extend beyond Cape Ann. The Salem and Beverly Water Supply Board, which oversees the public water supply for the two communities, filed a lawsuit in November alleging nearly $104,000 in unpaid taxes.

“My client, like a number of public and private entities on the North Shore, has been victimized by the deceptive and fraudulent scheme perpetrated by this payroll company,’’ said Curtis Pfunder, a lawyer representing the water supply board.

“There is a huge loss of trust,’’ said Katherine Flaws, an attorney representing DL Services HVAC of Peabody, which is suing for $9,800 in losses. “My client believes in giving the little guy a chance. He really trusted that they were going to fulfill their obligation.’’

Some businesses were repaid before lawsuits against Carr started piling up.

“I got lucky enough to freeze his bank account when there was money in it,’’ said Jeffrey D. Moorman, a lawyer who represented Lynnfield Engineering, a Danvers firm that received $16,684 from Carr, Moorman said.

“We were third in line, so we got our money,’’ said Paul F. Talbot, administrator of the Cape Ann Transportation Authority. “But there were a lot of people who weren’t so lucky.’’

Other lawyers said their clients know they might never be repaid. “We’re in line with a lot of people,’’ said Bumiller, the yacht club representative. “My clients are realistic enough to know they might not get anything.’’

“We’re way down on the list,’’ said Robert Barry, who represents The Shed Portable Sanitation in Gloucester, which has a $4,402.20 judgment against Carr.

“My client may well just end up eating its loss.’’

Kathy McCabe can be reached at katherine.mccabe@globe-.com. Follow her on Twitter @GlobeKMcCabe.