Payroll Tax Problems

Lack of Funds Not a Defense to Criminal Tax Fraud Charges

September 12, 2011 | by Dennis N. Brager

Criminal tax charges were recently upheld by the Sixth Circuit Court of Appeals against an individual who withheld payroll taxes but failed to pay those amounts over to the Internal Revenue Service (“IRS”). The defendant had been convicted of fifteen counts of Failure to Account for and Pay Over Withholding and FICA Taxes, in violation of 26 U.S.C. § 7202, and three counts of Making and Causing the Making of a False Claim for a Tax Refund, in violation of 18 U.S.C. § 287. The lower court sentenced the defendant in the case to 22 months in prison and 36 months of supervised release and ordered him to pay the amount owed plus penalties.

The defendant in the case, Richard Blanchard, did not pay trust fund taxes for approximately 6 years despite withholding taxes from his employees. The case started out as a civil tax audit, but then it became a criminal tax case. Blanchard appealed the decision of the district court, stating that the government failed to prove that he was financially able to pay over the employment tax and that the government must do so in order to show that his failure to pay violated the relevant statute. The appellate court found not only that the government did not need to prove that Blanchard was able to pay the tax, but also that Blanchard’s inability to pay that tax would not even constitute a defense to the government’s accusations. The court cited previous cases and stated that every individual must conduct his financial affairs in such a way that he is able to pay his tax liability when it becomes due. Thus, Blanchard’s conviction and sentence of 22 months plus 36 subsequent months of supervised release were affirmed.

The case is disturbing to the extent that it brings to mind the concept of debtors prison. Business owners need to understand that failure to pay withheld tax over to the IRS may result in criminal tax fraud charges as well as civil tax penalties.
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Payroll Tax Problems Cannot be Solved by Payment after Criminal Tax Charges Filed

March 9, 2011 | by Dennis N. Brager

A Kansas woman will still face federal criminal tax charges for failure to pay payroll taxes after a federal court ruled the charges should not be dismissed simply because the taxes have since been paid.

As tax litigation attorneys we frequently hear from clients who have been contacted by the IRS criminal investigation division. Their first reaction is, “I will get the taxes paid can you get the IRS to drop the charges?” Unfortunately at that point simply paying the taxes will rarely solve the problem by itself. Payroll taxes cases usually turn criminal because the tax problem has been ignored for far too long.

In this case, the employer was charged with seven counts of failing to pay over trust fund taxes (income taxes and FICA), which had been withheld from employees’ pay. The tax violations allegedly occurred between 2003 and 2005. She submitted evidence in 2010 that she had turned over to the Internal Revenue Service all unpaid taxes. She argued the charges should be dismissed since the taxes had been paid.

The government argued payment did not “cure” her of the violations or immunize her from prosecution. It was a novel legal question not addressed in case law. Section 7202 of U.S. tax law states: “Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall . . . be guilty of a felony. . . .”

The defendant noted the law makes no reference to a “due date” or other time frame. Section 7203 does make reference to a time frame when it states “at the time or times required by law or regulations.”

The court ruled that the statute’s wording “failure to pay over” necessarily encompasses late payments by any common sense standard. Additionally, the court ruled the defendant’s interpretation of the law would make it the only area of criminal law in which a crime could be undone at any time until conviction.

The defendant was also charged with two counts of failure to pay individual income taxes, which were not addressed in the court decision.
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Payroll Tax Problems best Handled by Experienced Business Tax Attorney

January 28, 2011 | by Dennis N. Brager

Our tax attorneys continue to see businesses struggle with payroll tax problems. Whether you have 3 employees or 300, or whether you have downsized in response to the struggling economy, payroll tax audits can cause serious legal and financial problems that can threaten the survival of a business.

The U.S. Department of Justice reports a recent case out of northern Virginia, in which a business owner was sentenced to 19 months in prison for failing to collect, account for, and pay to the Internal Revenue Service more than $200,000 in employee withholding taxes.

He was also ordered to pay $88,826.79 in restitution to the IRS.

The defendant was president of a computer software company. According to the government’s allegations, he failed to pay to the government employees’ withholdings for Social Security, Medicare and federal income taxes from December 2004 to June 2008.

The case was handled by the Justice Department’s Tax Division, the U.S. Attorney for the Eastern District of Virginia, and the Internal Revenue Service.
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Part-Time Bookkeeper Not an Independent Contractor

April 14, 2010 | by Dennis N. Brager

In a recent worker classification ruling SS8 2010030006 the IRS held that a part-time bookkeeper/general office worker was an employee and not an independent contractor. Generally the existence of an independent contractor relationship is based upon a 20 factor common law test set forth in Rev. Rul. 87-41, 1987-1 CB 298. Some of the factors the IRS took into account were:

The worker performed services at the payor’s place of business as well as her own home The payer provided all office supplies including telephone, fax machine etc., although the worker provided her own computer, and accounting software.

The bookkeeper was paid hourly The worker did not receive any benefits

Tax Fraud Results in 22 Years and $181 Million

June 9, 2009 | by Dennis N. Brager

Frank L. Amodeo has serious criminal tax problems. The U.S. Department of Justice announced that he has been convicted in one of the biggest employment tax fraud cases in Internal Revenue Service (IRS) history. The penalties for these criminal tax charges exceed 22 years and he will be required to pay a judgment of $181 million dollars.

Amodeo collected federal withholding taxes through his numerous payroll tax companies, and then knowingly neglected to forward this tax money to the IRS. Consequently, he was charged and convicted with five felonies: willful tax evasion (totaling $181 million); obstructing an agency proceeding (by intentionally defrauding the IRS in their attempt to collect payroll tax); and conspiring to commit wire fraud, to obstruct an agency investigation, and to impede the IRS. Amodeo was forced to surrender more than $1 million cash, three homes, several luxury automobiles, commercial real estate, a Lear Jet, and his corporations in attempt to fulfill his outstanding tax debt.

While this may have been one of the larger tax fraud cases on record, people have gone to jail for tax evasion for much smaller cases.

Payroll Tax Fraud Cases Expected To Increase

February 13, 2009 | by Dennis N. Brager

According to a report published by Tax Analysts, Assistant Attorney General Nathan Hochman, announced at a recent American Bar Association (ABA) meeting that the Internal Revenue Service (IRS) and the Department of Justice will be aggressively pursuing businesses with payroll tax problems. Hochman, who is the head tax lawyer for the Tax Division of the Department of Justice, said in tough economic times employers try to save money by not paying their payroll tax liabilities. He also noted that while in the past payroll tax problems have been handled on a civil basis that the IRS is now bringing criminal tax evasion charges, and that judges are handing out harsh sentences. I have previously blogged about the Easterday case in which Jack Easterday was sentenced to 30 months in prison for payroll tax fraud. Apparently there are more criminal payroll tax fraud cases to come.

If your company has payroll tax problems, or you have concerns about tax fraud or tax evasion please contact the tax lawyers at Brager Tax Law Group.

Independent Contractor or Employee Brochure Release by IRS

October 30, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has released IRS Publication 1779 with guidance for workers to help them determine whether they are employees or independent contractors. Interestingly IRS Publication 1779, which is only two pages does not specifically mention the 20 factor test set forth in IRS Revenue Ruling 87-41, 1987-1 C.B. 296. Instead it groups various factors into three categories-Behavioral Control, Financial Control and Relationship of the Parties. For example under the category Behavioral Control it states that “if you receive extensive instructions on how work is to be done this suggests you are an employee.”

While the publication appears to be aimed at workers rather than employers, an employer could be lulled into a false sense of security by relying on the publication since among other things it fails to mention that even though an employer does not actually exercise control, if the employer maintains the legal right to control the worker those workers may well be employees.

Nor does the publication mention that Section 530 of the Revenue Act of 1978 also known as the “safe harbor rules” allows employers to treat individuals as independent contractors even if they do not qualify under the common law rules. For more information on that topic see our article Independent Contractor Treatment for Workers is Broadly Available.

Expect IRS Payroll Tax Crackdown

September 10, 2008 | by Dennis N. Brager

According to the Government Accountability Office (GAO) the Internal Revenue Service (IRS) hasn’t been doing a very good job collecting payroll taxes. Payroll taxes are amounts that employers withhold from employee wages for federal income taxes, Social Security, and Medicare (so called trust fund taxes) as well as the employer’s matching contributions. The willful failure to pay these payroll taxes is a violation of the criminal tax law, a felony punishable by up to 5 years in jail under Internal Revenue Code (IRC) Section 7602.

The GAO study found that over 1.6 million businesses owed over $58 billion dollars in uncollected payroll taxes. The GAO concluded that the IRS didn’t file tax liens quickly enough, and that it didn’t go after the owners of businesses for the trust fund recovery penalty (TFRP) fast enough. The report also suggested that the IRS wasn’t seizing business assets often enough, pointing out that there were only 667 seizures in fiscal 2007, down from over 10,000 in 1997. The report was a rather scathing indictment of the IRS, and various U.S. Senators were quick to jump on the “bash the IRS bandwagon.” Senator Norm Coleman called on the IRS to “ratchet up its efforts” to recover billions in unpaid payroll taxes, and to hold “tax cheats” accountable.

The IRS responded that among other efforts it is developing and testing streamlined procedures to file injunctions against business with repeat payroll tax problems, and shut them down quickly. Apparently this would include employers whose principals were previously assessed a trust fund recovery penalty, as well as those who have operated multiple entities with payroll tax problems.

Disqualified Employment Tax Levy

August 22, 2008 | by Dennis N. Brager

One of the important protections from the Internal Revenue Service (“IRS”) is a taxpayer’s right to obtain a hearing with the IRS Appeals Division before an IRS collection officer can issue a tax levy. This hearing is known as collection due process, or CDP hearing. CDP hearings are permitted by virtue of Internal Revenue Code Section (IRC) Section 6330. Congress thought that some taxpayers were abusing the CDP hearing process to delay the collection of payroll taxes. As a result Section 8243(a) of the “Small Business and Work Opportunity Tax Act of 2007” amended IRC 6330(f) to permit a tax levy without first giving a taxpayer owing payroll taxes a pre-levy CDP notice if the levy is a “disqualified employment tax levy.” A “disqualified employment tax levy” is defined in IRC section 6330(h) as a tax levy served to collect the payroll tax liability of a taxpayer if that taxpayer or a predecessor requested a CDP hearing under IRC section 6330 for unpaid employment taxes arising in the two-year period prior to the beginning of the taxable period to be collected by the tax levy.

Earlier this year the IRS issued an internal memorandum intended as a temporary guidance to IRS revenue officers until the Internal Revenue Manual can be updated to reflect these changes. The memo is helpful in that it contains a chart to help determine whether a tax period is subject to the disqualified employment tax levy rules.

If you have a payroll tax problem contact California Certified Tax Specialist Dennis Brager for a consultation.

Trust Fund Recovery Penalty (TFRP) Upheld Against Both CFO and CEO

May 2, 2008 | by Dennis N. Brager

Internal Revenue Code § 6672 provides that so-called responsible persons who willfully fail to pay corporate payroll taxes may be held personally responsible for the payment of the trust fund portion of these taxes. Internal Revenue Code § 6672 is sometimes referred to as the trust fund recovery penalty (TFRP). Who is a responsible person? As the court in Horovitz v. United States (WD PA 2008) explained: “responsibility is a matter of status, duty or authority.” The definition of responsible person is not limited to the person with the final say on which bills get paid, but includes others as well.

Horovitz illustrates the principle that more than one person can have liability for the trust fund recovery penalty. The CFO was deemed to be a responsible person since he had the full authority to sign checks, could hire and fire employees, signed payroll tax returns, was a corporate officer, and a 20% owner. The CEO was also held liable for the trust fund recovery penalty since he invested several million dollars in the business, owned 80% of the stock, had unlimited hiring and firing ability and check writing authority, and served as the CEO with day to day involvement in the business.

If you have payroll tax problems, and the IRS is threatening to impose the trust fund recovery penalty contact the Los Angeles, California tax litigation lawyers at Brager Tax Law Group, A P.C.