Payroll Tax Problems—When is it Tax Fraud?

payroll taxesThe Internal Revenue Service is perennially concerned with employment taxes. There are a myriad of ways a payroll tax issue can quickly turn into tax fraud.


In the US, federal employment taxes are used to fund vital social nets that underpin a stable community. Business operators and owners are required to deduct and collect money for Social Security, Medicare, and federal income taxes from workers. Self-employed persons also make estimated or quarterly tax payments each year.


The obligation to collect and pay over these taxes to the Internal Revenue Service (IRS) usually falls to one or two responsible parties within an organization. The temptation to squeeze a little—or a lot—of personal profit out of deducted funds occurs frequently. Schemes involving evasion of employment tax disputes take a number of forms, including:

  • Leasing employees from an outside agency who qualify as employed workers
  • Falsifying employment roles to minimize taxes paid out, while continuing to collect taxes from unreported workers
  • Cash payment to workers
  • Pyramiding is a common scheme whereby companies withhold payroll taxes from the IRS and wind down or declare bankruptcy to avoid the tax obligations


A recent example of these common scams involves Montana business owner, Thomas O’Connell. Mr. O’Connell owned three plumbing businesses. Between 2005 and 2016, Mr. O’Connell stashed cash deducted from employee wages to pay his business and personal creditors. The sum of the unpaid tax was approximately $550,000.


As a business owner, Mr. O’Connell was in the position of collecting and paying over the taxes. Unfortunately, like many others, he was caught up in fortifying his bottom line rather than complying with the law.


The IRS caught up with him following a criminal tax investigation. The upshot is Mr. O’Connell pled guilty to employment tax fraud and will be sentenced in June of this year. He faces a possibly penalty of five years in prison. Case open, case closed.


It is easy to cross the line and borrow from deductions intended to pay worker’s tax obligations to the IRS. It is not so easy to understand the gravity of the action, or to reach out for legal help before the IRS brings allegations of a tax crime. If you know your employment taxes are in arrears, speak with a tax attorney with experience in criminal tax defense. Sooner is always better than later.


Skilled legal representation if you are challenged with tax litigation

If you are concerned about business compliance, an offshore tax question, or need guidance with an IRS audit, our tax lawyers at Robert J. Fedor, Esq., LLC can help. Whether you are local to Cleveland or Chicago or have foreign tax interests, we offer you seasoned, strategic tax guidance. Call us at 800-579-0997 or contact us online.


Download The Guide to  Employment Tax Fraud