Appearing in U.S. District Court in Madison, Wisconsin on March 30, 2018, 61-year-old Edgerton resident Gary Auerswald, former owner of Full Spectrum Building Components, Inc., pleaded guilty to failure to collect and pay over tax (26 U.S. Code § 7202), commonly known as “payroll tax fraud.” After withholding employment taxes, such as Medicare and Social Security taxes, from the wages of Full Spectrum employees, Auerswald deliberately failed to remit the funds to the Internal Revenue Service (IRS), instead using the money “to pay for business and personal expenses.” Auerswald was later sentenced to 24 months in federal prison, sending a stark message to business owners nationwide: remit payroll taxes in a timely fashion, or gamble with life-changing legal consequences.
Court Orders Defendant to Pay Nearly $600K, Serve 24 Months in Payroll Tax Fraud Case
The U.S. Department of Justice (DOJ) announced Auerswald’s guilty plea in a press release issued April 3, 2018. Less than three months later, the DOJ issued a second press release providing updates on the case, namely the results of Auerswald’s sentencing hearing, which occurred as scheduled on June 29, 2018.
At the hearing, Chief U.S. District Judge James D. Peterson sentenced Auerswald to a two-year prison term, plus an additional three-year period of “supervised release,” which is precisely as it sounds: a period in which a convicted offender must obey specific terms and restrictions as imposed by the court, much like parole. Failure to comply with these terms can lead to new penalties – including more prison time, depending on the severity of the violation.
In addition to the sentences imposed, the court also required Auerswald to pay the IRS over $593,000 in restitution – the amount needed to offset tax losses caused by Auerswald’s noncompliance.
Federal Payroll Tax Requirements for Employers
“Payroll tax” is a colloquial term often used in reference to employment taxes, or FICA taxes, which include (1) the Social Security tax, (2) the Medicare tax, and, for high-earning taxpayers, (3) the Additional Medicare Tax. Regardless of factors like the associated business entity’s age, size, structure, or profitability, U.S. employers are required by federal law – specifically, by 26 U.S. Code § 7202 (willful failure to collect or pay over tax) – to “collect [and] truthfully account for and pay over [FICA] tax[es]” to the IRS.
This is generally accomplished through the timely submission of Form 941 (Employer’s Quarterly Federal Tax Return), which, as the form’s official title implies, must be filed four times per tax year. (For specific payment schedules, employers should refer to Publication 15 (Circular E), Employer’s Tax Guide, for the relevant tax year.) Form 941 is a multipurpose document that enables employers to both (1) report the payroll taxes that were withheld from employee wages, and (2) make the required matching payments.
Auerswald fulfilled the first of his payroll tax duties as an employer – that is, to withhold such taxes from his employees’ compensation – but met with criminal charges after intentionally failing to pass the funds along (“pay over”) to the government. This outcome is perhaps unsurprising in light of the IRS’ historically aggressive approach to payroll tax fraud. Since payroll taxes are necessary to fund programs and benefits on which millions of Americans depend – namely Social Security and Medicare – investigators rapidly target taxpayers who willfully fail to contribute. For more information on this subject, our employment tax attorneys would encourage readers to refer to the following articles:
- Understanding the Trust Fund Recovery Penalty (TFRP)
- Understanding business owner liability for the TFRP
- Who is responsible for paying the TFRP?
- Penalties for failure to pay employment taxes
- Employment tax FAQ
Enhanced Penalties for a Pattern of Non-Filing or Non-Payment
On a closing note, it is worth mentioning Judge Peterson’s reference, at sentencing, to Auerswald’s “pattern of nonpayment” – a phrase which has worrisome implications for any taxpayers to whom it becomes attached. As our Panorama City tax lawyers previously noted, “[B]oth the Federal Government and… California can criminally prosecute a taxpayer where a multiyear pattern of non-filing exists.” Whereas a single year of non-filing is generally a misdemeanor in accordance with 26 U.S. Code § 7203 (willful failure to file return, supply information, or pay tax), a pattern of non-filing may be treated as a felony, exposing the taxpayer to greatly enhanced penalties. If you are concerned about a previous failure to file a tax return (or multiple failures to file such returns), you should consult with a criminal tax defense lawyer immediately.
Our Employment Tax Attorneys Can Help with Unpaid Payroll Taxes
Failing to file a tax return, failing to pay one’s tax liabilities, and failing to remit FICA taxes can all have serious consequences for business owners, the self-employed, and other taxpayers. If you have unfiled returns or unpaid tax debts, it is only a matter of time before you are chosen for an audit – or a criminal investigation.
Take action before it is already too late. Discuss your options with a knowledgeable and experienced tax attorney, like those at the Tax Law Office of David W. Klasing. We have more than extensive experience assisting business owners and business entities with civil and criminal payroll tax issues, payroll tax audits, and related tax matters. Contact us online to arrange a reduced-rate consultation or call our tax firm at (800) 681-1295 today.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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