If your business owes delinquent employment taxes, you could be subject to personal liability and you could go to prison.
1. The federal government is searching for you with increased enthusiasm
There are indications that the federal government has renewed interest in pursuing employment tax enforcement. For example, on December 8, 2015, the Internal Revenue Service (“IRS”) announced the “Early Interaction Initiative” to identify employers with symptoms of noncompliance. Also, the Department of Justice (“DOJ”) recently updated its Criminal Tax Manual related to Internal Revenue Code § 7202, a criminal statute addressing willful failures to collect or pay over employment taxes. At recent tax conferences all over the nation government leaders have discussed increased enforcement efforts in the employment tax arena. In today’s environment, businesses need to be acutely aware of their employment tax obligations and need to seek immediate help from a qualified tax professional if payroll tax compliance falters.
2. The IRS wants to hold you personally liable for your company’s delinquent employment taxes
Employers are required to withhold income tax and employment tax (i.e., social security tax, and Medicare tax) from an employee’s wages. The employer is required to collect the money in trust and pay it over to the U.S. Treasury on behalf of the employee. These taxes are commonly referred to as “trust fund taxes”.
To encourage compliance with collecting or paying trust fund taxes, Congress created the “Trust Fund Recovery Penalty” (“TFRP”) that can be assessed against any person who (i) is responsible for collecting or paying withheld income and employment taxes, and (ii) willfully fails to collect or pay those taxes.
A “responsible” person can be anyone who has the duty and authority to account for, collect, and remit trust fund taxes and can include:
(a) An officer or an employee of a corporation;
(b) A member or employee of a partnership;
(c) A corporate director or shareholder;
(d) Any other person with authority and control over disbursement of funds, etc.
Willfulness requires that the responsible person was aware, or should have been aware, of the outstanding trust fund taxes and either intentionally disregarded the law or was indifferent. However, no bad motive is required. For instance, using company funds to pay other business creditors instead of remitting those funds to pay the trust fund taxes to the U.S. Treasury may be indicative of willfulness.
If the IRS contacts you regarding unpaid trust fund taxes, then you will likely be interviewed by a Revenue Officer who will ascertain whether you were a responsible person and whether facts exist indicating willfulness. If the Revenue Officer determines that you were a responsible person who willfully failed to collect or pay trust fund taxes, then you will receive an IRS letter stating that you have sixty days to appeal the proposed TFRP assessment. If ultimately assessed with the TFRP, then the IRS will take enforced collection action against your personal assets such as filing a federal tax lien and/or seizing funds in your personal bank accounts or your personal assets. But that’s not the worst that can happen because the willful failure to collect or pay over trust fund taxes is a crime.
3. The DOJ wants to put you in jail
The DOJ has a toolbox of criminal statutes at its disposal to prosecute individuals for not collecting or paying trust fund taxes, including:
(a) Willful Failure to Collect or Pay Over Tax (26 U.S.C. § 7202);
(b) Tax Evasion (26 U.S.C. § 7201);
(c) False Return / Perjury (26 U.S.C. § 7206(1))
(d) Conspiracy to Defraud the Government (18 U.S.C. § 371)
The DOJ continues to prosecute individuals who willfully fail to pay trust fund taxes. In fiscal year 2015, there were 102 employment tax evasion investigations opened, 80 prosecution recommendations and 62 sentencings with an average sentence of 24 months in prison. For example, in July 2015, Maria Townsend, the former president of an electrical contractor company, was sentenced to 40 months in prison despite her claim that psychiatric disorders prevented her from paying over trust fund taxes. In April 2016, James Redding, the president of an interior construction business in the District of Columbia and Maryland, was sentenced to two years in prison for failing to pay over $1.4 million in income and trust fund taxes.
Employers facing trust fund tax compliance issues should immediately seek assistance from a qualified tax professional. For a free consultation, please contact Giovanni V. Alberotanza firstname.lastname@example.org or 410-649-4990.