Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

Employment Taxes and Worker Classifications

Civil and Criminal Employment Tax Enforcement

An IRS and DOJ Priority for 2016

Civil and Criminal Employment Tax Enforcement - The Government's Current Focus and What You and Your Clients Need to Know was the title of an entire program during the California Tax Bar Conference held this past November.   I anticipate we will see similar discussions related to employment tax and the enforcement of employment tax obligations during the upcoming Criminal Tax Seminar held in December.

The message is clear:  Employment and payroll taxes are a priority; the Department of Justice is teaming up with the Internal Revenue Service to find employment tax law violations, publicize them and then assess significant penalties and punishments.

Some of the more common Employment Tax schemes are:

  • Pyramiding,  A fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS. Businesses involved in pyramiding frequently file for bankruptcy to discharge the liabilities accrued and then start a new business under a different name and begin a new scheme. Source IRS.gov
  • Employee Leasing,  The practice of contracting with outside businesses to handle all administrative, personnel, and payroll concerns for employees. In some instances, employee-leasing companies fail to pay over to the IRS any portion of the collected employment taxes. These taxes are often spent by the owners on business or personal expenses. Often the company dissolves, leaving millions in employment taxes unpaid. Source IRS.gov
  • Paying Employees in Cash,  Paying employees, whole or partially, in cash is a common method of evading income and employment taxes. This results in lost tax revenue to the government and the loss or reduction of future social security or Medicare benefits for the employee.  Source IRS.gov
  • Misclassification of Employees,  (See part 2)
  • Filing False Payroll Tax Returns,  Preparing false payroll tax returns by understating the amount of wages on which taxes are owed, or failing to file employment tax returns are methods commonly used to evade employment taxes.  Source IRS.gov
  • Failing to File Payroll Tax Returns,

Criminal Tax Roundup 2014 - Northern District of California

Wow.  This may have been a record year for Criminal Tax Prosecutions in Northern California.  Taking a look at the cases prosecuted this year, it appears that Northern California's criminal tax prosecutions were greater in number than any other district.   Of course, we only have access to the filed cases at this time, the reports as to how many individuals/businesses investigated but not prosecuted will be out mid-2015.   We were able to secure a few non-prosecution agreements in 2014, but from the looks of things, the US Attorneys in Northern California are dominating criminal tax cases and the charges and sentences are increasing in number and length. 

Last year (2013) the top-ranked tax crime charges nationwide were:

tax perjury, tax evasion, converting public money, conspiracy, false claims, conspiracy to defraud by false claims, money laundering, mail fraud, fraud and related activity regarding identity, and structuring. 

So far in 2014, there haven't been a lot of surprises.   The Northern District prosecuted criminal tax cases involving:

False tax returns, Failing to file FBARs, Preparation of false tax returns, Conspiracy to file false claims, Wire Fraud, Aggravated identity theft,  Conspiracy to defraud the United States, and more.  

Interestingly, sentences handed down are on the lengthier side of what we have seen in the recent past: 

Aiding and assisting in the preparation of false tax returns (21 year fugitive found through Facebook) sentenced to 21 months

Tax evasion; sentenced to 30 months

Aggravated identity theft and preparation of hundreds of false income tax returns; sentenced to 30 months, and,

Failure to file tax returns, sentenced to 12 months

 

 

Many of the individuals prosecuted were tax preparers themselves, attorneys, and restaurant owners.