Employment tax fraud has for many years been an issue of vital importance to both the Department of Justice and the Internal Revenue Service (IRS). Employers have the obligation to withhold and turn over taxes belonging to individuals—if they fail to comply with this responsibility, our system of relying on voluntary compliance can erode. Additionally, because the IRS does not pursue individuals for the non-payment of their withheld taxes, the loss to the government is exacerbated. Not only are the funds not collected from the employer, but the employee is actually given credit for taxes paid.
How exactly does this play out? While each situation may differ due to various circumstances, for the purposes of this discussion let’s think of it this way:
Imagine a company has in employee who is paid every two weeks. However, when pay day comes the employee doesn’t receive the full amount. Instead, he/she is paid less, sometimes much less, because the employer is charged with making certain necessary deductions such as income tax (federal and state), social security and Medicare.
On top of that, the employer has the obligation to ensure that the withheld funds get to the IRS by making what is called a federal tax deposit. However, let’s pretend that in this particular situation, the employer does not send the funds to the IRS. At this point, a tax liability is created in the employer’s name and penalties and interest begin to accrue. The employee, however, still receives credit for the taxes that were withheld from his/her paycheck.
Fast forward to the end of the year. Now, the employee has a tax due based on income earned and deductions as we all do. The amount due is usually paid in advance by the withheld taxes even though in this particular example the funds aren’t actually paid in by the employer.
Recently, this issue has started to receive even more attention. In fact, the Wall Street Journal published an article discussing the Department of Justice’s intent to get tougher on employment tax fraud—which can include withholding by not paying over employment taxes (article link). This piece provides insight from the head of the Justice Department’s tax division, Caroline Ciaolo, “Employers across the country need a loud and clear message that this is not just a civil violation—that the willful failure to comply with the employment-tax laws is a crime and that we’re going to hold folks accountable.”
Despite the aggressive tone of Ms. Ciarolo’s statement and the Department of Justice string of victories against companies accused of employment tax fraud nothing has seemingly changed from a funding perspective to allow a new initiative. The question looms: has the Department of Justice realigned priorities and resources to target employment tax cases over other cases or is the publicity surrounding the recent verdicts an opportunity for the Department to send a larger message?
While no one has a crystal ball, at this point rather than focusing on the answer to this particular question, it is probably better to focus on resolving an employment tax issue before it gets the Department of Justice’s attention. For those of you facing this type of tax problem, we strongly urge to you contact us today. There is no reason for you to wait around to see what could happen given the current landscape.