The U.S. Justice Department's and IRS are aggressively pursuing unpaid employment taxes. The DOJ claims some employers are ripping off the IRS, using unsophisticated schemes that make them easy targets for enforcement. In addition to civil methods to recover unpaid employment taxes, DOJ indicated it will ramp up criminal enforcement as well.
Employers should not disregard these taxes or devise ways to avoid paying them. More information on employment taxes and penalties is provided below.
Employment Tax Basics
Employers are required by law to withhold federal income, Social Security and Medicare taxes through the Federal Insurance Contributions Act (FICA), and federal unemployment taxes through the Federal Unemployment Tax Act (FUTA). These are pay-as-you-go taxes; this means employers cannot fall behind on payments.
Avoid the Following Schemes
The IRS has pledged to actively investigate and prosecute the following schemes:
- Pyramiding, a practice in which a business withholds taxes from employees, but intentionally fails to remit them to the IRS. The business files for bankruptcy to discharge liabilities and then starts a new business under a new name.
- Paying employees in cash.
- Misclassifying an employee as an independent contractor. Employers are not responsible for withholding taxes for independent contractors, but this is likely to be a major point of emphasis by the IRS.
- Employment leasing, a legal but abused practice in which an employer contracts with an outside business to handle all administrative, personnel and payroll concerns, but the employer does not pay collected employment taxes to the IRS.
- Following frivolous arguments. Don't be fooled into believing that an interpretation of the tax code allows an employer to avoid withholding employment taxes.
- Filing false payroll tax returns or failing to file payroll tax returns.
Don't Ignore IRS demands
Don't overlook a letter from the IRS. The issue will not go away. You should ensure that all your tax records are available and organized. Next, you should talk to someone knowledgeable about tax laws, such as your accountant, tax attorney or an enrolled agent. A professional can help negotiate a settlement that may allow you to avoid the worst penalties.
Stiff Penalties Include Criminal Sanctions
It's a felony to willfully fail to collect or pay taxes to the IRS, punishable by fines up to $250,000 for individuals and/or jail time up to five years. Willfulness is a voluntary or intentional violation of the law, which can be inferred by facts or circumstances that show conduct likely to mislead or conceal. Financial difficulties may not be a reasonable cause for not paying employment taxes.
Lesser felony and misdemeanor penalties are also possible for willful failure to file a return or supply information. In fiscal year 2008, there were 42 convictions for failing to collect or pay employment taxes, with an average sentence of 29 months. The incarceration rate was 81 percent.