Ask The California Employment Tax And Payroll Tax Attorney – Post Covid-19 – Criminal Exposure When You Fail To Pay Your Payroll Taxes

By Robert S. Schriebman
2020

Introduction

With the beginning of the end of our shuttered existence, businesses are reopening. It is not the best of times and it is not the worst of times, but it will be uncertain times. What will be waiting for us when we turn on the “Open for Business” sign? Will there be customers? How long is it going to take for us to experience the new normalcy? Will we be in a depression? No one knows the answers to these questions and we cannot believe what we read in the paper or see on TV. We are all facing the greatest unknown in recorded history – perhaps ever.

As an attorney whose specialty is IRS and EDD tax controversies, I have had over 50 years of experience representing clients who owe taxes and cannot pay in full. I have written over 20 books and hundreds of articles dealing with IRS and EDD tax audits and tax collections. With all of this experience and knowledge, I do not have the answers to the questions posed above. But I have gained much insight and wisdom and this tells me that many small and medium size businesses are going to experience unprecedented problems in IRS and EDD payroll tax compliance throughout the remainder of 2020. The slow process of getting to normalcy, as we understood it before the pandemic, is going to find challenging issues with cash flow and that could translate into payroll tax compliance failures.

In this article, I will explain to you the statutes within the Internal Revenue Code that set forth tax crimes, felonies, or the failure to collect, account for, and pay over federal employment and withholding taxes.

Employment Tax Crimes and the Internal Revenue Code

Let’s start this discussion with an overview of compliance history. While payroll tax crimes have been on the books for decades, it has been rare for the IRS to criminally prosecute violators. Traditionally a chronic tax violator has been subject to civil penalties known as the 100 Percent Penalty, now known as the Trust Fund Recovery Penalty (TFRP); IRC § 6672 is the operative legislation. Basically, it states that responsible individuals within an organization may be held personally liable for their failure to withhold, account for, and pay over employee withholdings to the IRS. The IRS will disregard legal protections afforded by corporations and LLCs and go after people who are responsible for payroll tax compliance and who willfully fail in their compliance duties.

Every federal employment tax liability is composed of a portion belonging to the employee and a portion matched by the employer. The TFRP is composed of the types of taxes taken from an employee’s paycheck that belong to that employee – specifically, the employee’s portion of income taxes withheld and the employee’s portion of Social Security and Medicare taxes (FICA). The IRS refers to these taxes withheld from employees’ paychecks as “Trust Fund” taxes. The reason for this designation is that, by legal fiction, these portions are deemed held in trust by the employer for payment to the Treasury Department. The TFRP exposure is roughly 60% of what is owed by the corporation or LLC.

Specific Criminal Violations

The IRS can also refer an employer or any responsible person who has violated the provisions of Code § 6672 to its Criminal Investigation Division (CID). The CID will conduct a thorough investigation. If it feels a crime has been committed, it can refer the case to the Department of Justice for criminal prosecution. In other words, failure to collect, account for, and pay over withholding taxes caries criminal sanctions as well as civil penalties – and both can be imposed!

Some of the main criminal provision of the Internal Revenue Code are:

1. Code § 7206(1) – penalty for criminal tax fraud for false employment tax statements.
2. Code § 7204 – penalty for furnishing fraudulent withholding tax statements to employees.
3. Code § 7203 – penalty for willful failure to supply pertinent employment tax information.
4. Code § 7202 – felony penalty for willful failure to collect and pay over withholding taxes.

Criminal Prosecutions Will Increase

Whether or not the IRS will actually recommend criminal prosecution in an employment tax matter, will depend upon many facts and circumstances. Historically, these prosecutions are rare. I fear there will be increased violations that will warrant criminal prosecution as businesses struggle in a new economy to survive and stay competitive.

The EDD’s Version of TFRP

The EDD code, known as the California Unemployment Insurance Code (CUIC), does not have the many criminal sections that are found in the Internal Revenue Code. The EDD relies primarily upon CUIC §1735. This section is not a penalty.  It is not a criminal violation. It is however, a full 100% assessment against target individuals. The IRS version is roughly 60% of the company’s liability. The EDD relies upon its collectors to determine the responsible person(s) and to assess the tax by issuing a Notice of Assessment to the individual.

If the EDD believes that the violation is egregious enough, it will contact the district attorney’s office for the purpose of filing and prosecuting criminal charges. I have seen cases where the criminal charges are so severe that the person charged had no choice but to leave California or leave the country.