Jump to Navigation

ASK THE EDD LAWYER- CRIMINAL CONVICTIONS FOR PAYROLL TAX VIOLATIONS ARE ON THE RISE - ARE YOU ON THE EDD'S RADAR?

By Robert S. Schriebman
January 18, 2017

Introduction

On January 4, 2017 the U.S. District Court in Pennsylvania affirmed the conviction of Steven J. Lynch for federal payroll tax violations. While these types of cases are somewhat rare we are seeing more of them. The IRS is cracking down on those who do not take their payroll tax compliance obligations seriously. I believe that the EDD is not far behind. In this article I will discuss the Lynch case as well as give you insight into EDD payroll tax compliance objectives. U.S. v. Steven J. Lynch US District Court, W.D., PA, 2017-1 U.S.T.C. 50,116 (Jan. 4,2017)

The Case of Steven J. Lynch

Lynch was a tax attorney by profession as well as a sophisticated businessman. For over 10 years he evaded corporate payroll tax compliance. He used payroll tax dollars to make improvements to properties while giving the IRS the excuse that poor financial conditions prevented his compliance. He moved employees between corporations to avoid and evade payroll taxes. As a tax attorney he was held to a high standard. What surprised me in the Lynch case is that the IRS waited so long to prosecute him.

It would be a mistake for you to assume that the IRS only prosecutes people with specialized tax knowledge and skills. The IRS is going after anyone who fits the profile of deliberately using payroll tax trust funds to pay other business expenses. In a recent tax case an individual received a civil tax fraud assessment for paying his employee's wages before paying the IRS. The judge had no sympathy at all.

The IRS will be putting a great deal of emphasis on payroll tax compliance in the next several years. Undoubtedly this will lead to a substantial increase in payroll tax criminal prosecutions.

The EDD and Payroll Tax Criminal Prosecution

I recently had a candid conversation with a high-ranking EDD executive concerning a prospective client who had many years of deliberate payroll tax evasion. He received an EDD audit notice and I was concerned about his exposure to EDD criminal charges as well as his exposure to EDD civil tax fraud if he sbowed up for his audit appointment. I was concerned about his Fifth Amendment Rights and whether the EDD will automatically refer his matter to the District Attorney for prosecution. I was told that the EDD is more interested in future payroll tax compliance than it is with punishing a tax transgressor criminally. It is important hcre to understand that each EDD audit office and each EDD auditor has his or her own worldview on tax evasion. While the auditor's manager has the final say so on asserting civil fraud penalties or recommending criminal prosecution, each manager must make his or her own decision based upon the facts and the severity of the non-compliance. For example, if there were compliance problems in only one year out of a three-year audit, it is unlikely that any punishment will be meted out. However, if there are three or more years.ofbad conduct, this shows a deliberate intent to evade the law and penalties or worse may be a sure thing.

Does the taxpayer simply show up, lay his cards on the table, and beg for merey with his-hat-in-his-hand? OR does the taxpayer play hard-nosed with asserting his right against self-incrimination and let the EDD conduct an audit that may be only an estimated assessment? Keep in mind that an estimated assessment does not have the privilege of settlement negotiations. The taxpayer will have some hard choices ahead. There are no easy answers to this mess.

Conclusion

We weave a tangled web when we cheat on our taxes. I am constantly asked what the probability of an audit will be if a taxpayer does or does not do certain things. My answer has not changed over the years - if the IRS or the EDD audits you, the chances of getting caught are 100%.

***

Robert Schriebman has n successful practice in the Rolling Hills Estates area of Los Aflse[~ County serving cliellu thtOughout Califomia and the Unit~d Stllte5. H~ hns successfully dedicated more than 40 years to helpillg individuul taxpayers, business ownera, CPA5, Enrolled Agents, aod tax attorneys nllvigate the complicilted tn.... systems of the federal nnd state governments.

Robert Scbriebman hM written the only 2 books ever puhlighed deaHng with how Califbrnia Employment Development Department (EDD) operates. See "Califnrnia T!lX Collection Ptactie~ lind Procedures" Bod "Callforn!a Tn..xatlon Practice lind Ptocedutc," both published by Commerce Clearing House.

Robert Schrlebman has wrlttlln over 20 books ioeluding the major mBnual used nationally by practitioners and the IRS, "ms Tax Collection Procedures - A Manual for Praetitione,," published by Comme~e Clearing House.

Robert Schriebman ha.s written over 20 books including tJIC major mU1\lml u'ed o!ltionally by practitioners and the IRS, "IRS TAA Collection Proccdure~ - A Manual fnr Practitionera" pubU'hcd by Commerce Clearing Hou~e in Qdditioll to the only 2 books eycr publisht'd dt'{llin8 with how California Employment Development Oepanmcnt (EOO) operates, See "California Tax Collection Practice and Pro~edllreS" Qnd "Califomin Tl\X.(\tion Practice lind PlVcedure," bottl pub1i~hed by Commerce Clearing House.

Web Site Article 256