On March 21, 2017, the Treasury Inspector General for Tax Administration (TIGTA) issued a report entitled “A More Focused Strategy is Needed to Effectively Address Egregious Employment Tax Crimes” (here). The report presents the results of TIGTA’s evaluation of the IRS civil and criminal enforcement actions regarding payroll tax noncompliance. The report calls employment tax noncompliance a “serious crime” and recommends that the IRS, including Criminal Investigation (CI), “consider a focused strategy to enhance the effectiveness of the IRS’s efforts to address egregious employment tax cases”. “Egregious employment tax cases” are defined as employers who have 20 or more quarters of delinquent employment taxes. The number of employers with egregious employment tax noncompliance has more than tripled in recent years. As of December 2015, 1.4 million employers owed approximately $45.6 billion in unpaid employment taxes, interest and penalties.
The TIGTA report recommends the use of data analytics to better target egregious employment tax noncompliance, including identification of high-dollar cases and individuals with multiple companies that are noncompliant. The report recommends that the IRS Collection division expand it criteria used to refer potentially criminal employment tax cases for criminal investigation to include any egregious cases, not only those where there is a firm indication of fraud. The report recommends that IRS Collection make a criminal referral in any case involving a taxpayer who either owes more than $1 million in employment taxes or is involved in 10 or more companies that failed to remit payroll taxes to the IRS.
When an employer willfully fails to account for and deposit employment taxes, the IRS considers this to be stealing from the Federal Government, since the employer is holding the amounts in trust on behalf of the Federal Government. When an employer does not properly submit payroll taxes, the IRS can assess the Trust Fund Recovery Penalty (TFRP) against any person who is determined to be willful and responsible for the employer’s failure to pay over employment taxes, making the individual or individuals the liable party. According to the TIGTA report, in 2015 the IRS assessed the TFRP against approximately 27,000 responsible persons. The IRS has recently streamlined the TFRP assessment procedures and is more willing to seek injunctive relief to stop what the IRS believes is an egregious employment tax situation. The fact that the employer may have financial problems and must a pay other creditors to stay in business is not a defense.
IRS Criminal Investigation and the Department of Justice are particularly interested in any employer who fails to properly submit payroll taxes but takes a tax deduction for the payroll taxes not submitted. In addition, CI is looking for individuals who repeatedly start businesses, run up payroll tax liabilities, bankrupt or close the business and start a new business which immediately has payroll tax problems. CI and the Department of Justice are also looking at cases where payroll taxes are not submitted and the business owner uses the proceeds to pay extravagant personal expenses.
Employment Tax Fraud has been a priority of both IRS CI and the Department of Justice for a number of years. A recent criminal prosecution resulted in a sentence of 41 months in federal prison and an order to pay more than $2.9 million in restitution for evading taxes and failing to turn over employees’ withholding taxes.
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