For individuals who lived through the 1990s or developed a taste for the comedy of Jerry Seinfeld, the “Soup Nazi” character is something of a cultural touchstone. The “Soup Nazi” is a brusque chef who requires patrons to follow an exacting ordering procedure or face the consequences of his catchphrase “No soup for you!” This character has remained in the public consciousness for decades.
Considering this character’s continued popularity, a business known as Soupman, Inc. was formed to capitalize on this market. The company handles the sale of soups inspired by the Soup Nazi character and also handles licensing of “Soup Nazi” related intellectual property.
Unfortunately, accusations regarding payroll tax fraud by the company’s CEO, Robert N. Bertrand, have put the operation into disarray. According to federal prosecutors, the CEO improperly compensated workers and did not properly report or pay federal employment taxes.
When a company hires employees, it becomes obligated to follow an array of employment tax rules. These obligations include properly reporting employee compensation and ensuring that adequate payroll deductions are accounted for, held, and turned over to the IRS. In some circumstances, company management may come to believe that the potential short-run cost saving of payroll tax fraud is justified. However, this type of fraud is not only readily detectable but also carries extremely serious civil and criminal penalties.
Here, the CEO of Soupman, Inc. is accused of paying certain employees of the organization “under the table” in cash. As such, employment taxes were not accounted for or paid on these wages. Furthermore, the CEO is also accused of compensating other employees with large unreported awards of company stock. These actions were taken by the company CEO despite and against the advice of an external accountant who reportedly told the CEO that these payments were improper.
In all, prosecutors claim that the off-the-books payments that occurred from 2010 to 2014 amounted to $2.85 million. The failure to report and pay taxes on this compensation resulted in a tax loss of nearly $600,000 over the same period.
The CEO is currently charged with 20 charges of felony tax evasion because the payroll tax fraud occurred across 20 reporting periods. Aside from the criminal consequences that can be imposed in a payroll tax evasion scenario, other penalties apply.
Whenever a potential payroll tax fraud situation exists, it is essential for the accused to consider the consequences of being ruled a “responsible party.” Responsible parties are subject to the Trust Fund Recovery Penalty and can be held personally liable for the company’s unpaid payroll tax debts. The Trust Fund Recovery Penalty is equal to 100% of the unpaid employment tax that is withheld from employee’s net checks and the unpaid federal income tax withholding. Under IRC Section 6672, responsible persons include “Any person required to collect, truthfully account for, and pay over any tax…” This means that bookkeepers, accountants, owners, and CEOs can be considered responsible persons. The penalty can apply even if the individual has no actual knowledge that they payments are not being made.
While some company owners will present an “under the table” arrangement as a win-win for both the company and the worker, the reality is that tax fraud hurts all affected parties. Payroll tax fraud is particularly corrosive to the future interest of employees. Employees who accept cash payments under the table are not making contributions to Social Security, Medicare, unemployment, and other obligations. Because the worker is not making necessary contributions to these accounts through payroll taxes, the worker may be surprised to learn that benefits to an array of government benefits are not available. If the worker becomes unemployed or disabled, the payroll tax fraud will significantly impact the worker’s ability to obtain assistance and government benefits.
Bookkeepers, accountants and other potentially responsible parties must pay close attention to payroll tax obligations. The failure to carefully monitor this obligation and take corrective action should inconsistencies occur can lead to serious penalties that can include not only a prison sentence but also personal liability for the unpaid employment tax. Employees should also closely monitor for improper payment arrangements. While “tax-free, cash-in-hand” may seem like a good deal, in the long run, it is likely to create complications and difficulties for the worker.
To discuss a suspected payroll tax problem with experienced tax lawyers and tax professionals, call the tax lawyers of The Tax Law Offices of David W. Klasing at 800-681-1295 or schedule a reduced rate initial consultation online today. We have tax law offices conveniently located in Los Angeles and Irvine, California.
Here is a link to our YouTube channel: Click Here.
Here is a link to our practice overview video on employment tax representation.