Federal law enforcement authorities have increasingly intensified their focus on corporate misfeasance and white collar crime involving large companies. This focus has raised the stakes for directors and officers of businesses of various sizes throughout all sectors of the U.S economy. A recent media report covering the prosecution of a massive employment tax evasion scheme in Australia involving an individual referred to as a “former pre-insolvency advisor” serves as a reminder of the scope and impact of tax authority efforts to pursue tax evasion by commercial entities.
The report prepared by the Australian Tax Office directed four companies under control of a principal involved in the scheme to be forced into full liquidation. The tax scam was considered far reaching with the involvement of former employees and directors. The scheme reportedly involved “far too many” violations of the Corporations Act and Crimes Act to list according to the report. Employment tax fraud investigations are disruptive and costly for businesses, and prosecution could carry severe penalties like incarceration in prison, mandatory restitution, significant fines, and more. In this article, our employment tax attorneys discuss employment tax practices that could result in criminal charges.
Whistleblower laws offer lucrative rewards to individuals who assist the government in pursuing the prosecution of tax fraud. Businesses that fail to forward employment taxes collected from employees or fail to pay the employer’s share of this form of tax could face serious civil and criminal penalties. Companies are required by law to withhold and pay to the government the following:
- Federal Income Tax Withholding
- Unemployment Taxes
- Social Security Taxes
- Medicare Taxes
- State Withholding When Applicable (e.g. worker’s compensation contributions)
Examples of employment tax schemes that have been prosecuted by federal tax authorities in the past include:
- Payroll Tax Return Schemes: The company fails to file payroll tax returns or submits false returns.
- Misclassification of Employees: Businesses might misclassify employees as independent contractors to evade the obligation to pay employment taxes.
- Pyramiding Schemes: The business withholds employment taxes from workers payroll checks, but these sums are not forwarded to the IRS. When the employer allows the funds to accumulate rather than forwarding the money to the IRS, the amount owed to the government can “pyramid” to the point bankruptcy becomes inevitable.
- S-Corp Officer Compensation Handled Like a Corporate Distribution: This mislabeling of compensation facilitates the avoidance of employment tax liability.
- Paying in Cash: Employers often arrange to pay employees in cash to evade the responsibility for employment taxes.
- Off-Shore Employee Leasing: The employee quits his position and executes a contract with an offshore employee leasing company. The worker’s services are leased back to the company with the employee performing essentially the same duties for comparable pay. This approach involves paying the worker salary labeled as “deferred compensation,” which allows employment and income tax to be evaded.
These are just a handful of examples of practices that could lead to civil and criminal charges related to allegations of tax fraud. Anyone that is accused by the IRS of criminal activity should take the accusations seriously and promptly contact an attorney. An experienced tax lawyer, like those at Robert J. Fedor, Esq., L.L.C., can analyze the charges and evidence to develop a compelling defense strategy.