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ASK THE EDD LAWYER – CRIMINAL PROSECUTION AND JAIL TIME IS ON THE INCREASE FOR PAYROLL TAX VIOLATIONS. WHAT’S ON THE EDD’S AGENDA?

By Robert S. Schriebman

2017

Introduction

Last year the IRS issued a cryptic announcement: after many years of being passive, the IRS made it loud and clear that the gloves are off. The IRS will be emphasizing criminal prosecution and a jail time for payroll tax cheats. The recent case of J.N. Jackson is a clear example.

The Case of J.N. Jackson (CA — D.C., 2017-1 USTC § 50-162)

Jackson received an extra stiff jail sentence for willfully failing to pay over federal employment taxes. Technically this is known as an enhanced sentence. Jackson was on probation for stealing withholding taxes for his personal benefit when he was caught doing it again. The judge added quite a bit of jail time to Jackson's original jail sentence. No more probation.

Young People Beware

Young people are often sadly abused by payroll tax crooks. A few years ago I had a case involving a young man, let's call him Sammy. Sammy recently received an MBA from a prestigious eastcoast university. He was hired as CFO of a large corporation treating obesity throughout the nation. Sammy was given a prestigious title as a corporate officer, a corner office, and a BMW. Sammy thought he had it made. What Sammy didn't know, was that the president of the company was stealing payroll tax money out the back door and spending it on gambling, sports cars, a couple of big homes, and women. Millions of dollars were taken before the IRS knocked on the door. Not only was the IRS looking to get paid, it was also looking for the "responsible persons" for the assessment of the Trust Fund Recovery Penalty (IRC § 6672).

In those days the IRS was not looking for criminals. They were strictly focusing on the civil aspects of collecting the tax. I represented Sammy. He was lucky because there were others in the office who testified that the big boss totally controlled the day-to-day fiscal operations of the business and that Sammy worked under his direction and control.

Sammy did not come out of the fight with the IRS unscathed. He got hurt to the tune of several thousand dollars, but not several millions. Sammy was also assessed a portion of the overall trust fund penalty. He is still making monthly payments, but he will never fully pay the IRS bill because he is basically paying only the accruing interest. The most disappointing aspect for me personally was that I could not convince the IRS to go after the top guy criminally. In those days they weren't interested. Today it's a different matter. Today the head of a company would certainly face criminal prosecution and jail time.

Will The EDD Also Criminally Prosecute Payroll Tax Offenders?

Cheaters take heart! The EDD may give you a pass. Recently, I represented a contractor who had a long history of falsifying quarterly payroll tax returns. The returns were understated. His employees and even 1099 recipients, received more than the quarterly returns and 1099s reflected.

This contractor was not an evil man. He dug a hole for himself when cash flow was tight and he did not have the money to pay his taxes. One year became two; two years became five years. His conduct finally caught up with him. He was being audited by the EDD and was living in fear of criminal prosecution from the EDD. He was afraid to come forward and present his records because they were all false. I contacted top management at the EDD to determine his exposure to the District Attorney for criminal prosecution. I learned that the EDD will only prosecute for gross examples of fraud and that they would prefer to issue civil fraud penalties and have the taxpayer get back on the right track. In a fraud situation the EDD is not bound by the traditional 3-year audit period, but has an unlimited statute of limitations to conduct the audit. This means that the EDD can literally go back to day one of business operations up to the present day (CUIC §§1128, 1132, 1137, and 1142).

Conclusion

Tax fraud of any kind is not smart; it's dangerous. While the IRS is now actively pursuing criminally payroll tax cheats with fines and jail time, the EDD will not be far behind. Most people start out without a criminal intent. Business might be down; hard choices have to be made. But I can tell you this, I have seen decisions by federal judges that throw the book at an offender for paying his employees over paying the taxman. If you are facing exposure to criminal prosecution, it's best to be proactive. Seek the counsel of an experience tax lawyer. Do not rely upon your accountant to get you out of the situation. Accountants have no client privileges against confidential communications when it comes to fraud and evasion.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures – A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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