4-12-16 Priorities in Criminal Tax Enforcement - Jack Battaglia, Esq.

Posted on April 11, 2016

I recently attended the 32nd Annual National Institute Conference on Criminal Tax Fraud and a recurring theme was the emphasis that the Internal Revenue Service Criminal Investigation ("CI") is placing upon prosecuting those who fail to pay over taxes withheld from employees.

The Internal Revenue Code in §3102, §3402 and §3403 imposes a duty on the employer to withhold and pay over to the United States Treasury withholding taxes and the employee's share of FICA.On the civil side, IRC §6672 imposes a civil penalty equal to 100% of the tax that should have been collected and paid over.This tax is imposed upon the person responsible for collecting and paying over the taxes.

IRC §7202 imposes a criminal penalty on any person required to collect, account for, and pay over these taxes who willfully fails to do so.This is a felony punishable by a fine of not more than $10,000 or imprisonment of not more than 5 years, or both.

CI started 102 investigations in 2015 under this Section and was successful in prosecuting 87 cases.The incarceration rate was at 77% and the average sentence was 24 months.

WILLFULLNESS

The key element of IRC §7202 is the willful failure to collect, account for, and pay over the tax.

The failure to pay over withholding taxes because a company did not have sufficient funds is not a viable defense against the willfulness requirement of §7202.

Paying net wages to employees with knowledge that withholding taxes are not being remitted supports the element of willfulness.

The question that often arises is when does a person's failure to collect and pay over the withholding taxes to the IRS constitute a crime.That is, when does this become criminal? Here is what the IRS looks for:

  • Multiple quarters of failure to comply.
  • Failure to file the employment tax returns notifying the IRS that there is a liability for withholding taxes.
  • Using the money to pay other expenses of the company's operation instead of paying the withholding taxes.
  • Buying "toys", boats, cars, jewelry, etc. and not paying over the withholding taxes.

These are just a few of the factors that you need to be aware of in determining whether or not a client has a serious problem with withholding taxes.

CONTACT BY REVENUE OFFICER

When a client first receives notice from the Internal Revenue Service that he or she is delinquent in withholding taxes, the delinquency must be immediately addressed.Failure to reply to the IRS, failure to meet with the Revenue Officer, and hiding assets or switching bank accounts can lead to serious problems and an investigation by CI.

The best way to avoid a criminal investigation is to meet the problem head on by making sure that employment tax returns are filed, the client cooperates with the Revenue Officer trying to collect the taxes, make arrangements for the payment of the taxes, and most of all staying current.

It is very difficult to show that the taxpayer is willfully non-compliant with the statute when he or she is meeting the current requirements of the statute and making an attempt to pay back withholding taxes.

Evading this issue will do nothing more than cause a greater problem for the taxpayer.

Finally, if a Special Agent shows up, do not let your client speak to him or her.

If you have any situations you would like to discuss with me, feel free to call.