Withholding and remitting employment taxes is a basic part of doing business for most U.S companies. When a business ceases to account for wage withholding with the Internal Revenue Service (IRS), it is often only a matter of time before the agency comes knocking.
Federal withholding is a mundane but critical means of maintaining business compliance. Taxes typically withheld from employee paychecks include federal income tax, Social Security, Medicare and federal unemployment under the Federal Unemployment Tax Act (FUTA). Employee withholding not only helps fund national safety net programs, but it pays the way for employees to collect from that social safety net in later years.
The business of policing withholding
In the past, payroll tax issues have been a high priority for the IRS. Lack of business reporting is sometimes a tipoff for the IRS and can lead to an IRS investigation. Such was the case for Dean Dawson, a 65-year-old West Virginia businessman. According to the IRS, Dawson operated a real estate group known as Real Property Consulting Group LLC since 1994. For reasons unknown, between 2015 and 2023, Dawson fraudulently represented to his employees that he was paying their withholding taxes. While he provided W-2 forms to his employees, he did not file them with the IRS. And while he withheld taxes from his workers' paychecks, he did not pay the taxes over to the IRS.
While some business owners cheat the IRS because their company is foundering in red ink, this was not the case with Dawson. He used the withheld funds for the personal expenses of himself and his wife, paying off credit card debt, providing his nonemployee wife an income, and paying off a mortgage in her name. Dawson also chose not to file personal tax returns or pay his own income taxes between 2018 to 2022.
The question of getting caught
Consider the number of ways that the IRS could identify this tax fraud. Dawson provided W-2 forms to his employees for several years, even though no matching forms were being filed by his company with the IRS. He accounted for and paid over no withholding funds for years, and finally, he chose not to file his own tax returns or pay income taxes. It should go without saying that identifying businesses that are delinquent in paying employment taxes is not a paper and pencil exercise anymore, but the domain of algorithms and likely artificial intelligence (AI).
Getting caught
As one would expect, Dawson was investigated by IRS Criminal Investigation (IRS: CI) and prosecuted. He pleaded guilty and was sentenced to 18 months in prison for willful failure to pay over employment taxes. In addition, he was ordered to pay restitution of $430,527.56 (plus interest). Overall, the IRS notes he caused a tax loss to the IRS of about $525,000.
Only a defendant can know, after being found guilty, or pleading guilty, whether the crime was worth the time. Prison time and the future imperative of paying off almost half a million dollars in restitution and tax liabilities. If you are involved in an employment tax scheme, or if you borrowed just a “little bit” from your wage withholding account—speak with an attorney for solid advice on how you might move beyond your present situation—hopefully without moving to prison.
Has the IRS contacted you about your employer payroll taxes?
As a business owner, you need to understand regulatory requirements to keep your company compliant. The legal group at Robert J. Fedor, Esq., L.L.C., delivers the guidance needed to keep your tax returns, and payroll operations off the radar of the IRS. Speak with our knowledgeable tax attorneys today at 440-250-9709. We serve clients across the U.S. and internationally from our offices in Cleveland and Chicago.
If you would like to review a resource to help you gain a better understanding of employment tax fraud, download our free eBook, Employment Tax Fraud: What Every Business Needs to Know.
