Rebecca Sparkman, the Director of the IRS Criminal Investigation Division, said that criminal investigations will devote additional resources to employment tax cases. Employment tax cases are ones where the responsible person withholds income and employment taxes from its employees but does not remit the withheld funds to the United States Treasury. The responsible person is usually the business owner but can include an officer or employer of a corporation, a partner of a partnership, a member or employer of an LLC, a corporate director, or a shareholder. While the responsible person has always been personally liable for the payment of such taxes, the IRS in the past rarely prosecuted the responsible person criminally, especially if the money was used to keep the business operating.
One of the most egregious cases in the employment tax realm involved a professional employer organization which entered into staff leasing agreements with client companies to manage their payroll and insurance programs. Larry Kimes and Charles Pircher were sentenced in 2014 to 144 and 132 months in prison respectively for their role in not turning over more than $130,000,000 of payroll taxes to the government. Sparkman said that while the IRS is concentrating its efforts on the most egregious offenders, even employers who don’t remit the taxes to the government due to financial hardships are still committing a crime. In fact, when the employer withholds the taxes due to financial hardship (i.e., using the money to keep the business going) that makes it easier for the government to establish a willfulness argument. Historically, if the responsible person was using the money to keep the business going he or she did not face criminal prosecution. Conversely, where the money was used for personal reasons, such as to buy a vacation home, the IRS was historically more likely to prosecute criminally.
In another case, the CEO of a wireless technology firm, Distributors Networks, LLC, was recently sentenced to 30 months in prison for failure to pay over $900,000 in employment taxes and Social Security and Medicare taxes. The IRS noted that, for those people that think it is not a crime to pay business expenses rather than employment taxes, payment of employment taxes even in this context is required. It is worth noting that the CEO provided employee perks as well as 100% matching contribution to the employees’ 401(k) plans; this situation makes clear that spending money on business expenses to keep the business afloat does not absolve the offender of criminal conduct.
The new IRS initiative makes it even more important to make sure clients are remitting withheld taxes. Not only can they be personally liable for such taxes (which liability is not discharged in bankruptcy), but they face an increased chance of criminal prosecution as well.
Michael A. Kulzer is the founding shareholder of the firm and earned his J.D. degree at the Rutgers University School of Law, where he was awarded the Prentice Hall Award for outstanding performance in the area of taxation. He earned his LL.M. in Taxation at New York University. Mr. Kulzer’s particular areas of expertise include estate planning, corporate taxation and business planning.