Unpaid Payroll Taxes and Potential Criminal Prosecution

Federal law requires employers who pay wages to employees to withhold and remit employment taxes to the IRS.  In addition, employers must timely file IRS Forms 941 (or Forms 943 or 944, if applicable) to report their employment taxes.  Employers who fail to comply with either requirement can face significant civil penalties for non-compliance.  Business owners, and employees hired by the employer to file and pay its employment taxes, may also be at risk for having to pay the employees’ portion of the tax (plus their income tax withholding).  This is the Trust Fund Recovery Penalty (“TFRP”).  The IRS has authority to assess the TFRP against those parties the IRS deems responsible (as defined by the Internal Revenue Code).  This overcomes state law protections otherwise in place to protect business owners against personal liabilities (e.g., if the entity is a Limited Liability Company).

Perhaps a lesser-known consequence of the failure to satisfy employment tax obligations is that it can give rise to a crime for “responsible persons.”  The IRS’s criminal investigation division has for many years kept employment tax crimes high on its priority list.  Those cases are often developed during an audit of a taxpayer’s tax returns, or sometimes from IRS collections, when a taxpayer’s case has been assigned to a Revenue Officer (usually assigned the case to obtain missing tax returns or work with the taxpayer to resolve an outstanding tax balance).

According to Bloomberg Tax (July 8, 2022 Daily Tax Report), in June 2022 the IRS began directing Revenue Officers to trace where the funds employers should have been using to pay the employment taxes went instead.  If paid to the business owner(s), or used for their benefit, and not reported on their income tax returns, the unreported tax may be assessed on their individual income tax returns (Form 1040), along with a civil fraud penalty, which is 75% of the unreported tax.  That could be a large monetary penalty.

If the unreported tax is high enough, the case may be sent to criminal investigation for review.  This is a shift from prior policies, where Revenue Officers’ investigations were used to determine the persons responsible for failing to pay the tax, and proposing assessment of the TFRP against them, upon which statutory interest accrued.  This change allows the IRS to assess civil penalties against individuals for unpaid income taxes (on their Form 1040), as a result of their not paying employment taxes for a business or employer.

If you are facing a payroll tax matter, it makes sense given this heightened scrutiny, that you consult a tax attorney well-versed in these matters to properly advise you on how best to handle the situation.  If you have questions, contact Anderson & Jahde for competent, professional tax help.

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