Department of Justice Signals Increased Prosecution for Failing to Pay Employment Tax

Posted on November 29, 2016

If you are a regular reader of this blog, you are aware that the IRS and the United States Department of Justice are now vigorously pursuing employment tax violations and are referring more cases for criminal prosecution.

If you are a business owner and have employees, you are required by law to withhold taxes from their pay and to pay those funds to the IRS. The tax withheld from employees includes all of their income tax and one-half of their FICA and Medicare taxes. These funds are reported on the employer’s quarterly federal Form 941 tax return along with the other one-half of the FICA and Medicare tax that is required to be paid by the employer.

When the employer does not pay the withheld funds to the IRS, the business now has an unpaid tax liability due to the IRS, including penalties and interest. The IRS will then seek payment from the business on a voluntary basis. If the payment is not forthcoming, then the IRS ultimately takes enforced collection action against the business, including levying on its bank accounts, its credit card processor and other businesses in an effort to collect the taxpayer’s accounts receivable.

The IRS can also propose to assert the withheld portion of the unpaid liability against the owners, officers and shareholders of the business under the Trust Fund Penalty Recovery. Failing to file a tax return is a misdemeanor, punishable by imprisonment up to one year. However, someone who willfully fails to collect, truthfully account for and pay over withholding tax can be found guilty of a felony, the punishment of which can include imprisonment for a period of greater than one year.

We have previously reported that the IRS and the Department of Justice are now vigorously pursuing employment tax violations and are referring more cases for criminal prosecution. In a development that signals this increased prosecution, the United States Department of Justice’s Tax Division requested the removal of the words “infrequently prosecuted” from the U.S. sentencing guidelines manual for Internal Revenue Code §7202.

Internal Revenue Code §7202 provides for the criminal prosecution of any person who willfully fails to comply with his or her statutory obligation to collect, account for and pay over income tax withholding, Social Security tax and Medicare tax. Violation of this provision is a felony subject to a fine up to $10,000.00 and up to 5 years in prison.

The above-referenced amendment to the sentencing guidelines took effect on November 1, 2016, and removes the phrase “the offense is a felony that is infrequently prosecuted” from the commentary included in the sentencing guidelines for failing to pay over taxes under Internal Revenue Code §7202.

The phrase was removed because the number of prosecutions under this section have since increased. Do you have unpaid employment tax liability do to the IRS? Contact us, we can help.