Payroll tax problems can overwhelm a company and prove criminal

Sloppy accounting is no excuse when the Internal Revenue Service audits a company. IRS investigations looking at payroll tax problems are complex and costly. Business owners who fail to account for wages paid or withhold employee payroll taxes could face criminal penalties including jail time and large fines. It may even become a struggle to keep a company open and operating.

Businesses need to make regular payroll tax deposits based on actual wages paid. A conviction from last year details what can occur when a company underreports wages paid to employees.

An Ohio businessperson was found guilty of willfully aiding and assisting the preparation of a false corporate tax return. The man was the CEO of a payroll company. The company claimed that it paid employees $2,441,566 in the third quarter of 2007 and owed $603,532 in taxes. In reality, employee wages for the quarter totaled $6,630,677 and the tax liability was $1,710,688. The man's sentence included 15 months in prison and a significant restitution order.

Sophisticated schemes to hide business assets and income definite pitfalls

Some company owners go a step farther and try to shield all company profits from tax. A recent federal grand jury indictment on tax evasion charges alleges that a construction business owner set up a trust to divert income and assets. The scheme also shielded employees from taxation.

The trust appeared to be a valid estate-planning tool. However, by having payment invoices routed through a trust checking account he could disguise income and earnings. Other accusations claim he avoided employment payroll taxes for several years and did not file individual income tax returns.

The business owner could face up to 59 years in prison and fine of more than $3 million, if convicted of the charges.

What rises to the level of tax fraud?

There is a difference between "tax avoidance" and "tax fraud." A business might, for example hire an independent contractor rather than an employee for a short-term project to avoid withholding payroll taxes that it would need to for an employee. Evading taxes by using shell entities or paying employees in cash off the books on the other hand is likely going to lead to a criminal tax investigation for fraud.

The three elements of criminal tax evasion are:

  • A underpayment of taxes owed
  • An affirmative act to evade or attempt to evade paying the tax
  • Willfulness or the "voluntary, intentional violation of a known legal duty"

In criminal prosecutions, the burden of proof on the prosecution is the beyond a reasonable doubt standard. When the court determines the underpayment of taxes was due to fraud, the court can impose a penalty equal to 75 percent of the underpayment. Jail time is also common in criminal tax fraud cases.

If your company has been notified of an IRS audit, contact an experienced tax attorney. A visit from an agent may mean the start of serious problems that can culminate in the seizure of business assets, company failure and criminal charges. Consulting an attorney who understands tax law and IRS procedures is a step toward protecting your rights.