The Internal Revenue Service (IRS) puts enforcement of employment tax responsibilities at the top of its list. Discrepancies in reporting and payment of employment taxes can trigger a civil or even criminal tax audit.
There are several employer actions that could attract the attention of the IRS and lead to a dispute or worse.
Cash Wages
Payment under the table and keeping two sets of books are scams that have been around forever. Payment in cash can mean an owner or operator is not accurately accounting for income and expenses, employees, and, of course, employment taxes. Payment in cash is legal if it is reported and employment taxes are paid over to the IRS.
Employee Classification
To skirt employment tax regulations and Workers’ Compensation rules, employers may misclassify full-time employees as independent contractors. Upon investigation, if the IRS finds workers were misclassified, the business may be liable for employment taxes on those employees.
False Payroll Income Tax Returns
Businesses try to avoid paying employment taxes by filing inaccurate payroll tax returns—or failing to file the returns at all. While this tactic may have worked when all reports were pushed in paper, digital reports and AI will speed the discovery and prosecution of these cases.
Pop-ups and Pyramiding
Pyramiding is a short-term tax fraud scheme whereby operators use a start-up business to employ workers, incur debt, and withhold employment taxes. The pop-up may file bankruptcy to shed debt and then move to a different geographic locale and repeat the same scheme.
When withheld employment taxes are not collected, documented, and turned over to the IRS, the IRS will pursue the individual who was responsible for paying over the taxes as well as the individual who may have stolen the proceeds—if they are not the same person. The Trust Fund Recovery Penalty (TFRP) pierces the corporate veil and allows for the direct collection of embezzled taxes from the personal assets of parties ultimately responsible for the correct and legal functioning of the business.
If you are engaged in any of these employment tax practices, or the IRS has been in contact, speak with a tax attorney familiar with IRS criminal tax defense.
Are you involved in an employment tax dispute? Contact our tax group
With offices in Cleveland and Chicago, the tax lawyers at Robert J. Fedor, Esq., LLC answer questions about criminal tax charges, foreign bank accounts, or tax litigation. When you need skilled tax advice locally or abroad, contact us or call 800-579-0997.
