Michael Gerstenberg, 50, owner of Allentown, Pennsylvania-based trucking company A.E. Logistics, was charged earlier this year in U.S. District Court with payroll tax fraud and filing false returns, federal crimes for which he could face several years of prison time. The charges arise from allegations that Gerstenberg, in addition to filing false tax returns on behalf of his girlfriend, spent more than $730,000 in withheld payroll taxes – money which should have been deposited with the Internal Revenue Service – to fund “extravagant personal expenses,” including gambling, country club fees, and a luxury vacation to the Caribbean. Whether they do business in Pennsylvania, California, or any other state, employers should think twice before attempting to cheat the IRS out of payroll (FICA) taxes. Not only can payroll tax evasion lead to criminal prosecution, it can also trigger a potentially debilitating trust fund recovery penalty (TFRP), which makes the employer liable for the full amount of the withholdings.
What Are the Criminal Penalties for Payroll Tax Fraud or Failing to File Returns?
According to court records, Gerstenberg allegedly (1) failed to turn over to the IRS approximately $732,291 in withheld payroll taxes during the period from 2010 to 2015; (2) failed to file tax returns for A.E. Logistics (which the FMCSA, a government agency that regulates the trucking industry, presently lists as “not authorized”); and (3) filed, without informing her, false tax returns for 2012 and 2013 on behalf of his girlfriend, in both cases overreporting her income.
If Gerstenberg is convicted or pleads guilty, he may be facing months or years of prison time, supervised release, fines, and/or IRS restitution – all common penalties in criminal tax cases. For instance, the criminal penalties for payroll tax fraud, which are set forth under 26 U.S. Code § 7202, include a fine of up to $10,000 and a prison sentence of up to five years. This offense, known in the Internal Revenue Code as “willful failure to collect or pay over tax,” occurs when an employer “willfully,” or intentionally (as opposed to negligently), “fails to collect or truthfully account for and pay over” payroll taxes, such as Medicare and Social Security taxes. These types of taxes are also known as “FICA taxes,” named for the Federal Insurance Contributions Act.
Criminal penalties for other common tax offenses include:
- Making and Subscribing False Returns – Up to three years in prison, fines up to $100,000
- Tax Evasion – Up to five years in prison, fines up to $100,000
- Willful Failure to File Returns or Pay Taxes – Up to one year in prison, fines up to $25,000
Payroll Tax Fraud and the Trust Fund Recovery Penalty (TFRP)
Though perhaps the most daunting, prison time is not the only consequence which can result from payroll tax fraud. In addition to court-imposed criminal penalties, the IRS may impose trust fund recovery penalties equivalent to 100% of the withholdings due, plus interest. As a “responsible person” – a term defined by the IRS to include any group or individual with “the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes” (which is another term for payroll taxes or FICA taxes) – a business owner may therefore be held personally liable for the full amount owed the IRS. To provide a few examples, “responsible persons” could include corporate directors, shareholders, or officers, members of partnerships or boards of trustees, and companies that provide payroll services.
However, a responsible person must also be deemed to have acted willfully in order to face the TFRP for payroll tax obligation failures. As the IRS explains in Notice 784, “‘Willfully’ means voluntarily, consciously, and intentionally. A responsible person acts ‘willfully’ if this person knows that the required actions [related to FICA taxes] are not taking place for any reason.” By way of example, the IRS then references “[p]aying other business expenses instead of trust fund taxes…”
While the concept of willfulness may seem straightforward, it can actually become a complex grey area, underscoring the need for competent representation in any case where fraud has been alleged. For an in-depth discussion of willfulness, readers may be interested in our articles on the willfulness requirement for tax evasion, how the IRS determines if conduct is willful, or defense tactics that make it hard for the government to prove willfulness.
Facing an IRS Payroll Tax Audit? Contact Our California Business Tax Lawyers for Help
If your small California business is facing a payroll tax audit, or if you owe payroll taxes to the IRS, you are at risk of incurring penalties, being investigated for fraud, and ultimately, losing business – or your freedom. Protect your bottom line by working with an award-winning employment tax lawyer who has more than 10 years of auditing experience.
At the Tax Law Office of David W. Klasing, our business tax attorneys, tax audit lawyers, and CPAs can walk you through the basics of California employment tax law, handle negotiations during a California or federal employment tax audit, help you set up a payment plan for unpaid payroll taxes, appeal an assessment of the TFRP, or develop strategies for dealing with payroll tax liabilities in the future. To schedule a reduced-rate consultation with the Tax Law Office of David W. Klasing, contact our tax firm online, or call (800) 681-1295 to request an appointment.
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.
Note: If you have concerns about the privacy of our initial or subsequent communication and are unable to easily travel to our Irvine / Orange County Main Office, consider scheduling a GoToMeeting to safely and securely establish an initial or maintain an existing attorney client relationship. With end-to-end encryption, strong passwords and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link. Call our office and request a GoToMeeting if you are an existing client. We are generally happy to travel to any of our appointment only satellite offices for a subsequent meeting in appropriate circumstances once a relationship is established via a signed engagement letter and the payment of an initial retainer or where enough retainer is available where a current client to cover the reasonable travel time and time required for the meeting.
Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company? Absolutely not! See our policies that address this issue here:
California Employment Tax Representation
The economic downturn has caused employers to try and drastically reduce their operating costs. Businesses across the country are hiring independent contractors as opposed to employees to avoid paying workers’ compensation insurance, payroll taxes, and employee benefits. Employers working with independent contractors can also be attempting to avoid being hit with wrongful termination claims, questioning why they did not previously consider experienced California employment tax representation.
I am David W. Klasing, a tax attorney with more than 20 years of experience. My legal team and I am committed to preserving your best interests in worker classification audits and against allegations that you owe payroll taxes. Whether you have concerns about corporate tax liability or employment tax, contact my law firm today to schedule a consultation at my law office in Los Angeles, Irvine, or San Diego, California.
Misclassifying employees as independent contractors
If you are a business owner accused of misclassifying employees as independent contractors, obtain experienced employment tax representation. The tax ramifications for misclassifying independent contractors are serious enough to threaten your very ability to continue operating. Your personal assets could also be at risk where the corporate veil could be pierced over payroll and other employment-related obligations.
When you select the Tax Law Offices of David W. Klasing, my legal team and I will take every measure possible to protect your company from back taxes and penalties for misclassifications on employment tax. We have an extensive background handling worker classification audits and know how to preserve your interests with minimal tax and legal implications.
Delinquent payroll taxes and trust fund recovery penalty
A payroll tax is a tax that is withheld from an employee’s wage that is in turn paid to the state or to the federal government. The employer effectively acts like a trustee of those funds for the government. The withheld amount is called “trust fund taxes” since it is deemed to be held in trust to the government. IRC § 6672. For this reason, the IRS is particularly aggressive in pursuing payroll tax violations; in practice, it is often more aggressive than pursuing personal income tax violations.
A mistake made in withholding or paying one’s payroll taxes may result in a monetary penalty, but if the IRS is convinced the act was done “willfully”, it will pursue criminal prosecution — which may result in more serious consequences.
Protecting Employers from Personal Liability
If you are a shareholder, business owner or an investor, you could be under investigation by the IRS if your company missed payroll taxes, failed reporting its withholdings or are facing charges of payroll tax fraud. Obtain experienced legal counsel from a highly skilled Los Angeles employment tax lawyer. The IRS will not only go after your company but could also pursue action against you personally. My legal team and I are committed to protecting you from any financial and legal ramifications.
Questions about delinquent payroll taxes and trust fund recovery penalty
- What happens if an employer continues to incur new payroll tax liabilities?
- California Employment Taxes Basics
- How Does the IRS Develop an Employment Tax Fraud Case from the First Indication of Fraud to a Criminal Indictment?
- Can more than one person be considered responsible by IRS
- How unpaid employment tax payments are allocated
- When a corporate officer is considered a responsible party
- Examples of trust fund recovery penalty determinations
- Failing to pay employment taxes after notice is given
- How to determine responsible person for trust fund recovery
- Assessing trust fund recovery penalty and option to appeal
- What is the trust fund recovery penalty?
- What are the penalties for failure to pay employment taxes
- When am I considered liable for company’s employment taxes
