Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

Willful Failure to Report Employee Wages to EDD Leads to Felony Conviction

For over a decade, Fumeei Nikko Wu owned and operated the iconic 10,000 square foot, three-story Stonehouse Old Brewery in Nevada City, CA. Following complaints and a 1½ year-long joint investigation by local police and TRaCe (the Tax Recovery and Criminal Enforcement Task Force of the Department of Alcohol and Beverage Control), Wu was arrested for payroll tax evasion and other felonies.

Wu had owned the property since 2003, but since 2008 she had apparently been struggling to find tenants and turn a profit. From July 2011 through September 2013, Wu did not report all of her employee’s wages and remit payroll taxes - an audit determined that she failed to report a total of $578,659 in wages to the California Employment Development Department (EDD), and that she owed a total of $46,071.

The charges and its consequences

The Attorney General’s office issued an 18-count criminal complaint against Wu, which included multiple counts for willful failure to file quarterly reports to the EDD and pay over amounts due; failure to file returns, collect, account for, and pay unemployment contributions; and willful misrepresentation to the EDD of amounts she actually paid to employees in order to lower her required unemployment benefit payments.

Wu was arrested in October 2015, held on $200,000 bail, and spent 12 days in jail immediately following her arrest. Her business license was suspended, forcing her to cancel events at the Stonehouse. Local news reported that Wu and her friends put together a fundraising campaign through GoFundMe and Facebook to pay $15,000 in back event deposits, wages, insurance and utility costs. They also held a fundraising party in late November, 2015.

Wu recently pleaded no contest to five of the felony counts raised against her under the California Unemployment Insurance Code:

  1. Section 2101.5 - Willfully making false statements or knowingly failing to disclose material information in order to lower or avoid required contributions.
  2. Section 2106 - Procuring, counseling, advising, coercing or assisting someone to willfully make a false statement or representation, or knowingly failing to disclose a material fact for the purpose of lowering or avoiding required contributions.
  3. Section 2108 - Willful failure or refusal to make the required contributions.
  4. Section 2117.5 –Submitting a fraudulent return, report, statement or false statement with or without intent to evade the required filings and contributions under the law (misdemeanor carrying civil penalty of up to $1,000 and up to one year’s imprisonment, or both). 
  5. Section 2118.5 – Willful failure to collect, account for, and pay over any tax or amount required to be withheld by a person required to do so (felony punishable by fine of up to $20,000 and/or imprisonment, at the discretion of the court).

The other charges were dropped, but Wu will have to pay restitution and charges for the investigation against her, and may serve time in jail.

San Francisco employment tax attorneys

Failure to report employee wages and make required payments to the EDD can result in harsh penalties. If you are a business owner who is under investigation or otherwise requires legal and tax assistance, contact the Moskowitz, LLP team today.

"Good Motives" are Not an Excuse for Unpaid Employment Taxes

A recent Texas case clearly demonstrates how unforgiving the courts can be when it comes to unpaid employment taxes.

McClendon v. U.S.

In May of 2009, Dr. Robert McClendon learned that the Chief Financial Officer of his medical practice had been embezzling money from him, and that his practice owed roughly $10 million in unpaid employment taxes to the government. McClendon loaned $100,000 of his personal funds to the practice to pay his May 15, 2009 payroll, closed the practice and remitted its receivables to the IRS to help pay down the tax liability.

Tax penalties under 26 U.S.C. § 6672 were assessed at $4,323,343.70. McClendon paid a small percentage and then sued the government for a refund and abatement of the balance.

Trust fund taxes belong to the U.S.

Under 26 U.S.C. § 3102(a) and 26 U.S.C. § 3402(a), employees are obligated to withhold social security and income taxes from their employees' wages. These taxes are held in trust and must be paid over to the government, or the employer faces a penalty equaling the entire amount of the unpaid taxes.

The Section 6672 Penalty

The Section 6672 Penalty may be imposed on any "responsible person" who willfully fails to collect, account for, and pay over trust fund taxes. McClendon agreed that he was a responsible person for his practice, but argued that his failure to pay the back taxes to the IRS was not willful:

  • First, McClendon claimed that his loan to the practice was limited to payroll payments, and that the funds were therefore encumbered. The court disagreed, ruling that allowing responsible persons to evade a finding of willfulness and liability through preferential lending arrangements would "undermine the purpose of § 6672 in assuring that trust fund taxes are paid to the government."
  • Second, McClendon attempted to use the "reasonable cause" defense by arguing that he acted "morally and generously" by using his personal funds to pay the medical practice’s staff. The court did not accept this argument either, stating that good motives will not exonerate a taxpayer who "consciously decides to use unencumbered funds to pay a creditor other than the government."

The court acknowledged that Dr. McClendon's motives were admirable, but clearly stated that they were still not legally relevant.

San Francisco Employment Tax Attorneys

McClendon’s medical practice was finished by theft, mismanagement and a tax dispute. Tax issues have destroyed many businesses. Don’t let it happen to yours. Contact the employment tax attorneys at Moskowitz, LLP today.