The IRS
watchdog known as the Treasury Inspector General for Tax Administration
has issued a report with
some shocking figures about serious employment tax crimes. The number
and size of payroll tax violations is going up, and mere IRS penalties are not
enough to stop the trend. The report urges two parts of the IRS--including
its Criminal Investigations Division--to act. Employment tax embezzlement is a
felony punishable by up to five years in prison. Employers are required to
withhold and remit payroll taxes including federal income taxes, Social
Security and hospital insurance (Medicare) taxes withheld from employee pay.
Willful failure to remit them is a crime.
The new
report first tries to lay out the levels of payroll tax noncompliance. It
also assesses the extent of civil and criminal enforcement actions taken by the
IRS. And change is probably coming. The watchdog report recommends that
the civil and criminal parts of the IRS take on a new and focused strategy to
become more effective against egregious employment tax cases. In addition,
the report suggests that IRS collection personnel should expand their criteria
for referring potential criminal cases to that division of the IRS. In
particular, cases involving over $1 million, and individuals involved in 10 or
more companies with payroll tax failures.
In part,
IRS officials have already agreed with the recommendations. The IRS agreed
with the need to develop a focused strategy. The IRS disagreed that its
collection function should expand the criteria for referring cases to the
Criminal Investigation Division. But as these issues get resolved, make no mistake,
employment tax noncompliance is a serious crime. When employers fail to account
for and deposit employment taxes, which they hold in trust on behalf of the
federal government, they are stealing from the government.
These
stolen funds include amounts used to fund important federal programs including
Social Security and Medicare. The federal government must use general tax
revenues to make whole the Social Security and Medicare trust funds for
uncollected employment taxes. The report sees growing problems. As of December
2015, 1.4 million employers owed approximately $45.6 billion in unpaid
employment taxes, interest, and penalties. Assessing 100% trust fund penalties
on all responsible persons is an effective civil enforcement tool that the IRS
can use to discourage employers from continuing egregious employment tax
noncompliance. Even so, we should expect more enforcement, and earlier
identification of payroll tax problems from the IRS.
In 2015,
the IRS assessed the 100% trust fund recovery penalty against approximately
27,000 responsible persons. That may seem a high number, but it was 38 percent
fewer than just five years before. Meanwhile, the number of employers with
employment tax noncompliance for 20 or more quarters of delinquent employment
taxes is steadily growing. It has more than tripled in a 17-year period. Even
the 100% trust fund recovery penalty fails to deter some violations.
The report
says that 59 individual taxpayer accounts assessed the trust fund recovery
penalty for 10 or more entities. That sounds recurrent if not downright
flagrant. Yet the report reveals that only 5 of the 59 individuals (a mere 8.5
percent) had been investigated by the Criminal Investigation Division of the
IRS for potential criminal prosecution. The report also notes that there were
many taxpayer accounts with over $1 million in trust fund recovery penalty
assessments from 2010 through 2015. Approximately 700 individuals were assessed
penalties in excess of $1 million each during this period, yet there were fewer
than 50 of those individuals who were the subject of criminal investigations.
Although
the willful failure to remit employment taxes is a felony, there are fewer than
100 criminal convictions per year. In addition, since the number of
actual convictions is so tiny, the report suggests that fear of prosecution
does not deter payroll tax violators. Even though willful failure to remit
employment taxes is a felony, prosecutors obtain fewer than 100 criminal
convictions each year.
By Robert W. Wood, Esq. Published in Forbes
23 March 2017
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