The IRS has experienced a 28% decline in collectors from 2010 to 2014. Meanwhile, the IRS estimates that $59 billion is owed from unpaid employment taxes from which employment tax returns have been filed. Additionally, taxes withheld by employers make up two-thirds of IRS revenue collection by the IRS. These factors converge for the perfect storm of IRS Criminal Tax Enforcement on payroll taxes.
In advising clients, there are 3 huge traps for the unwary that the IRS is using to establish knowledge in criminal employment tax prosecutions.
First, the IRS has instituted new civil programs for early intervention by reaching out and touching a delinquent taxpayer as close to the noncompliance as possible. The program includes delivering a so-called 903 Letter to a delinquent taxpayer for each quarter of employment taxes that are not paid. This is a civil letter that will be used to demonstrate knowledge of the unpaid taxes and the requirements in a later criminal proceeding.
Second, the IRS routinely interviews business owners regarding their role in and knowledge of employment taxes. The IRS interview relates to the applicability of the civil trust fund recovery penalty. Unfortunately, the interview is committed to writing and is signed by the business owner on an IRS Form 4180. This document contains the taxpayer’s own words admitting to the non-payment of employment taxes signed under penalties of perjury (a/k/a an admission, a/k/a a confession).
Third, delinquent taxpayer/business owners often claim tax withholding on a Form W-2 with respect to their own company without giving it a second thought. If they gave it some thought, they may realize that they just claimed withholding for employment taxes that they know they didn’t pay the employment taxes on, as they paid no employment taxes for any of their employees. The IRS and Department of Justice Tax Division consider this type of behavior to be of a flaunting and egregious nature even though it occurs so often, even with the assistance of the knowing tax preparer in many instances.
On December 10, 2015, the Deputy Assistant Attorney General for Appellate and Review in the DOJ Tax Division emphasized that with regards to criminal employment tax cases, DOJ Tax has been getting good sentences that hopefully will have a strong deterrent effect.