Helping clients avoid employment tax criminal penalties

By Arlene Hibschweiler, J.D.; Martha Salzman, J.D.; and Michael Tedesco, J.D.

Many practitioners who counsel business clients, both small and large, are familiar with the difficult challenges that quickly arise when taxes are withheld from employee wages but not turned over to the federal government. On occasion, these taxes are not paid over due to the misdeeds of an in-house bookkeeper or a third-party payroll service responsible for ensuring that a business meets its tax obligations. More often than not, however, employers, acting without bad intentions, use the withheld money to satisfy pressing trade obligations or to meet payroll, debts the nonpayment of which is likely to lead to the shutdown of the business and loss of employee jobs. Unfortunately, this strategy can prove extremely costly to both the business and its principals, generating exposure to substantial penalties for late payment or failure to pay at all.

Making the stakes even higher, the federal government has in recent years taken steps to increase the likelihood that employment tax cases will be handled criminally. All of this means that tax advisers working with business clients cannot focus solely on strategies to minimize and pay the business's income tax obligations but also must be extremely vigilant regarding employment tax duties.

The Tax Division of the U.S. Department of Justice (DOJ) pursues both civil litigation and criminal investigations and prosecutions for failure to comply with employment tax obligations. Recently, the DOJ has increasingly emphasized criminal prosecution of those who fail to comply with their obligations to withhold, account for, and pay over federal employment taxes.

The role tax professionals play in detecting and addressing nonpayment early is becoming increasingly important. The Treasury Inspector General for Tax Administration (TIGTA) published a report about trends and recommendations for enforcement of employment tax obligations. TIGTA found that the number of employers with 20 or more quarters of delinquent employment taxes had grown from approximately 5,000 in 1998 to nearly 17,000 in December 2015. However, the report further notes that the IRS assessed 38% fewer trust fund recovery penalties from FY 2011 to FY 2015 due to decreases in collection personnel. Fewer collection actions make it even more important for tax professionals to discover and address delinquent employment tax issues early.

A business that has fallen behind on tax payments, without any apparent consequences, may be tempted to continue nonpayment. As a result, the amount of the deficiency is likely to grow, increasing the likelihood of an eventual criminal referral. In that light, the clear trend of such a significant increase in the number of cases involving severe noncompliance is alarming. A tax professional detecting the nonpayment early and assisting the client in developing a feasible plan to pay the tax owed offers an important service. Moreover, to minimize the personal financial exposure of persons potentially responsible under Sec. 6672, a practitioner should be certain to designate any voluntary payments toward the trust fund portion of the delinquency. Again, the quicker the trust fund portion is paid, the less likely the need for a trust fund recovery penalty investigation and the less likely there is to be a subsequent, or concurrent, criminal investigation.

For a detailed discussion of the issues in this area, see "Employment Tax Penalties: Let's Keep It Civil," in the February 2018 issue of The Tax Adviser.

— Arlene Hibschweiler, J.D.; Martha Salzman, J.D.; and Michael Tedesco, J.D.

The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.

Also in the February issue:

  • An update on developments affecting partners and partnerships.
  • An introduction to proposed AICPA ethics rules for tax practitioners.
  • A look at health reimbursement arrangements for small employers.

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.

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