Under the U.S. Tax Code, both employees and employers are required to pay certain taxes which are used to fund various government programs. These withholding taxes are deducted from an employee's paycheck and employers must report such withholdings on a quarterly basis to the Internal Revenue Service. Withholding taxes include Social Security, Medicare, unemployment and disability. Employers who fail to pay these payroll or employment taxes may face fines and other penalties including criminal prosecution.
Business owners and employers who pay employees partially or wholly in cash must be careful to deduct, report and pay withholding taxes to the IRS. In cases where a business owner or employer fails to keep accurate records related to cash withholdings, it can be difficult or even impossible to prove the accuracy of one's financial records in the event of an IRS audit.
Additionally, employers must ensure they maintain accurate financial records with regard to documenting payroll taxes. In cases where an employer fails to validate or update the annual salaries and incomes of employees, it's likely that he or she will err when attempting to calculate and pay payroll taxes. Regardless of the circumstances surrounding these types of tax mistakes, the IRS is likely to slap an employer with penalties and, in some cases, may even pursue criminal charges related to tax evasion and payroll fraud.
During 2013, the IRS' Criminal Investigations unit initiated 140 criminal cases in which employers were charged with attempting to evade paying employment and payroll taxes. In addition to hefty fines and restitution fees, of those cases filed, nearly 80 percent resulted in a targeted employer being sentenced to prison with each serving an average of two years time.
Individuals who identify as business owners and employers are frequently targeted by the IRS for audits. It's critical, therefore, that these individuals take steps to ensure their financial and tax records are accurate. For individuals who have questions or concerns about current or past employment or payroll tax withholdings, an attorney who handles criminal IRS matters can answer questions and, if necessary, assist in defending against criminal charges.
For more information about the U.S. Tax Code or to speak with an attorney regarding IRS questions or charges:
Source: IRS.gov, "Employment Tax Fraud - Criminal Investigation (CI)," 2014