Yes, You Can Face Jail Time For Nonpayment Of Employment Taxes

On April 11, 2019 the Internal Revenue Service announced the results of a national two-week education and enforcement campaign to combat employment tax crimes featuring visits to nearly 100 businesses showing signs of potential serious noncompliance and taking several dozen legal actions against suspected criminals.

Taxes withheld by employers account for nearly 72% of all revenue collected by the IRS, making noncompliance and cheating in this area one of the biggest problems for the nation’s tax system. Payroll taxes are a priority area for the IRS, and IRS Field Collection and IRS Criminal Investigation (CI) undertook a special campaign to shore up this area of compliance during a two-week period ending April 5, 2019.

“Payroll taxes form a key part of our tax system,” said IRS Commissioner Chuck Rettig. “When individuals and businesses evade their employment tax obligations, it not only undermines our tax system, it also creates an unfair situation for people who are following the law. The IRS is committed to compliance in the payroll tax arena, which helps ensure fairness and faith in our tax system”.

On the criminal enforcement side, IRS CI worked with the Department of Justice Tax Division and U.S. attorneys around the nation to focus on about 50 law enforcement actions related to employment tax crimes.  During this two-week campaign, IRS CI indicted 12 individuals, executed four search warrants and saw six individuals or businesses sentenced for crimes associated with payroll taxes. In addition to these early numbers, roughly two dozen more enforcement actions are planned in the following weeks.

Criminal Penalties

When an employer willfully fails to pay over employment taxes, the Justice Department can pursue criminal prosecution under IRC Sec. 7202. Willful nonpayment of employment taxes is a felony under IRC Sec. 7202, punishable by a fine of up to $10,000, imprisonment up to 5 years, or both. When an employer withholds money from its employees’ paychecks and then does not pay it over to the Treasury, this act is considered embezzling money from the U.S. Treasury.

Civil Penalties

Even if the Federal government chooses not to pursue criminal prosecution, the civil penalties are still substantial.  The IRS will impose a 100% trust fund recovery penalty under IRC Sec. 6672 on “responsible persons” who were required to pay over the money or who controlled the funds that should have been deposited. Many people associated with a business may be found to be a responsible person, including corporate officers, treasurers, managers, and even bookkeepers, in certain circumstances. These persons are held to be personally responsible for the taxes owed even when the business was conducted as a corporation or LLC.

Understanding Employment Taxes

Federal Income Tax – Employers generally must withhold federal income tax from employees’ wages with such withholding based on tables provided by IRS.

Social Security and Medicare Taxes – Employers generally must withhold part of social security and Medicare taxes from employees’ wages and you pay a matching amount yourself.

Additional Medicare Tax – Beginning January 1, 2013, employers are responsible for withholding the 0.9% Additional Medicare Tax on an employee’s wages and compensation that exceeds a threshold amount based on the employee’s filing status. You are required to begin withholding Additional Medicare Tax in the pay period in which it pays wages and compensation in excess of the threshold amount to an employee. There is no employer match for the Additional Medicare Tax.

Federal Unemployment (FUTA) Tax – Employers report and pay FUTA tax separately from Federal Income tax, and social security and Medicare taxes. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay.

Self-Employment Tax (SE tax) – is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most employees.

Depositing And Reporting Employment Taxes

Depositing Employment Taxes

In general, you must deposit federal income tax withheld, and both the employer and employee social security and Medicare taxes.  There are two deposit schedules, monthly and semi-weekly. Before the beginning of each calendar year, you must determine which of the two deposit schedules you are required to use. If you fail to make a timely deposit, you may be subject to a failure-to-deposit penalty of up to 15%.

Deposits for FUTA Tax (Form 940) are required for the quarter within which the tax due exceeds $500. The tax must be deposited by the end of the month following the end of the quarter.

You must use electronic funds transfer (EFTPS) to make all federal tax deposits.

Reporting Employment Taxes

Generally, employers must report wages, tips and other compensation paid to an employee by filing the required form(s) to the IRS. You must also report taxes you deposit by filing Forms 940, 941 and 944 on paper or through e-file.

What Should You Do?

This announcement by IRS of criminal prosecution the IRS is pursuing should be a wake-up call to any business experiencing employment tax issues. If you or your business owes employment taxes, it is important to get an attorney involved immediately regardless of whether your case has yet to turn criminal.  The tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California know exactly what to say and how to handle issues with the IRS as well as State Tax Agencies.  Our experience and expertise not only levels the playing field but also puts you in the driver’s seat as we take full control of resolving your tax problems. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you.