Employment tax enforcement is a critical element of the IRS's overall tax enforcement effort. It is an area in which the Service has unique tools at its disposal—tools that some practitioners may find surprising. Recent government reports indicate a growth in "egregious employment tax noncompliance" and focus on the need to combat this trend through increased use of civil and criminal enforcement mechanisms (see, e.g., Treasury Inspector General for Tax Administration (TIGTA), A More Focused Strategy Is Needed to Effectively Address Egregious Employment Tax Crimes, Rep't No. 2017-IE-R004). In light of these trends, practitioners should have a basic awareness of some of the unique tools the government uses to enforce employment tax laws.
The IRS and the Department of Justice have made special efforts to publicly warn taxpayers that employment tax enforcement is currently among the nation's top tax enforcement priorities. The TIGTA report cited above indicates that even greater enforcement efforts are needed, hinting that the IRS should more aggressively assert trust fund recovery penalty assessments and recommending that the IRS expand its criteria for criminal referrals in the employment tax context. The report, while generally critical of inadequate employment tax enforcement, comes on the heels of the IRS's release of its 2016 Data Book, which indicates a greater-than-40% increase in all employment tax civil penalties assessed in fiscal 2016 from those in 2015. These factors and trends signal that a greater focus on employment tax enforcement is underway and likely to continue.
The trust fund recovery penalty under Sec. 6672 is a basic procedural weapon that allows the IRS to assess a civil penalty against any "responsible person" who willfully fails to pay over a business's withheld employment taxes. In addition, Sec. 7202 makes it a crime to willfully fail to collect or pay over these taxes. There is significant overlap between the two provisions, and civil trust fund recovery penalty investigations are often a ripe source for criminal referrals. Practitioners advising or representing taxpayers with civil trust fund penalty exposure should, therefore, always remain cognizant of potential criminal implications.
The line between a civil and criminal violation is often quite thin. The elements necessary to establish a trust fund recovery penalty under Sec. 6672 are virtually identical to those necessary to establish criminal liability under Sec. 7202. Almost by definition, then, taxpayers facing a trust fund recovery penalty assessment often exhibit many characteristics that could support a criminal referral. That, of course, can increase the stakes when employment tax violations are at issue. And with TIGTA's recent report recommending an expansion of the criteria for referring potential criminal employment tax cases, practitioners may see a renewed focus on developing such cases.
Moving forward, employment tax enforcement is likely to continue to increase, despite drops in overall tax enforcement in recent years due to budget and personnel constraints. Both the IRS and the Department of Justice have openly signaled that addressing employment tax noncompliance is a high priority. Recent statistics underscore those signals, and recent government reports have recommended that the IRS do even more to enforce the employment tax laws. In this environment, practitioners should pay particular attention to their clients' employment tax compliance issues and advise them accordingly.
For a detailed discussion of the issues in this area, see "Tax Practice & Procedures: Employment Tax Enforcement Is Trending," in the July 2017 issue of The Tax Adviser.
—Jason B. Freeman, CPA, J.D.
The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.
Also in the July issue:
- A look at how to adjust foreign capital gains and losses for the foreign tax credit.
- An analysis of taxpayer penalties and the tax treatment of indemnity payments.
- A look at issues with the sailing permit for foreign taxpayers.
AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year.