Employment Tax Abuse Has Become the Number Two Compliance Issue with the IRS
September 1, 2001
In an announcement that further increases the importance of the Cleveland
Indians decision, the Internal Revenue Service (IRS) recently stated that
employment tax compliance has become the second highest enforcement priority for
the agency. At a recent American Bar Association meeting, Tom Burger, director
of IRS’ Office of Employment Tax Administration and Compliance (OETAC), stated
that the IRS soon will have more than 1,000 new agents engaging in compliance
reviews and conducting employment tax fraud investigations. In addition, the
OETAC intends to increase its coordination efforts with the IRS’ Criminal
Investigation Division (CID) to investigate and prosecute a wider number of
employment tax fraud cases.
What Are an Employer’s Tax Obligations?
An employer is required, by law, to withhold and timely remit federal
employment taxes on a quarterly basis. These taxes include federal income tax,
Social Security and Medicare taxes, and unemployment tax. Employers report
federal income and employment taxes withheld from employees on Form 941,
Employer’s Quarterly Federal Tax Return. Withheld amounts must be deposited in
an authorized bank or financial institution pursuant to federal tax deposit
requirements. Failure to comply with these withholding, deposit and reporting
requirements, when unintentional, results in the imposition of a variety of
civil penalties (e.g., monetary penalties, including interest). Most states
impose similar withholding, depositing and reporting requirements for state (and
local) employment taxes.
If, however, the failure to comply with the employment tax requirements is
willful and deliberate, criminal penalties can apply, up to and including,
imprisonment. According to the IRS, from 1998 through July 2001, there were 168
employment tax evasion investigations initiated that resulted in 154 criminal
convictions – an 86-percent success rate. These convictions resulted in an
average prison term of 17 months for the violators. Keep in mind that
imprisonment is in addition to the civil penalties.
What Can Employers Expect?
With the additional staff, the IRS intends to increase the number of
employment tax compliance reviews it conducts and to perform these reviews with
greater scrutiny. Examples of the various types of tax-evasion schemes the IRS
will be looking for include: pyramiding (i.e., withholding taxes but
intentionally not remitting them), employee leasing (the leasing organization
withholds but does not remit the withheld amounts), paying employees in cash
with a corresponding failure to withhold on all or some of the cash paid to the
employee, filing false payroll tax returns or failing to file payroll tax
returns at all. With the increased coordination with the CID, you also can
anticipate a greater likelihood that more cases will be referred to the CID for
criminal prosecution.
For more information, contact Mindy Leeds at 1-888-688-8500 or via e-mail at
mrleeds@hklaw.com.
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