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How Unpaid Payroll Taxes Can Become a Criminal Matter

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How Unpaid Payroll Taxes Can Become a Criminal Matter


A major part of any small business’ tax preparation involves how they account for payroll taxes. This is a major focus of the IRS every year, resulting in many significant civil monetary penalties, fines, and assessment of interest. Unpaid payroll taxes can rapidly grow so large that many small businesses find themselves unable to crawl out from under a mounting debt and close their doors for good.

But the federal government is taking enforcement of payroll tax compliance one step further. According to recent statements released by the IRS and the Department of Justice, investigating agents will be instructed to give more consideration to referring certain cases for criminal tax prosecution. This only makes payroll tax compliance even more significant for small businesses and the individuals running them.

To learn more about developments in government enforcement protocol and how you can avoid criminal tax prosecution, contact the Dual Licensed Tax Lawyers and CPAs at the Tax Law Offices of David W. Klasing by calling (800) 681-1295 today. We can offer you a reduced rate case evaluation in exchange for your first call or visit.

What Are Payroll Taxes and Why Are They Important?

The government views payroll tax as a critical aspect of their tax revenue. Roughly 70% of all taxes collected every year come from employers collecting payroll taxes from paychecks. Managing payroll taxes also happens to be a significantly complicated area of the tax code, landing many small businesses in hot water with the IRS every year.

It can be easy for the business that is taking out the payroll tax portion from the paycheck to turn around and spend that money on the business itself, believing that they can worry about paying off the tax later. The government knows this, which is why the penalties and interest that accumulate on unpaid payroll tax debt are some of the most substantial contained within the tax code. If a business gets to be far enough behind on their payroll tax payments, it is possible that they may end up with so much debt that they may never be able to repay it fully.

Past Practices for Enforcing Payroll Tax Payment

The common method for the federal government to address unpaid payroll liabilities has been through civil action. This is done through IRC Section 6672, also known as the trust fund recovery penalty. An agent of the IRS’ Collection Division would complete an investigation into how much was owed and who was responsible for not paying it. The agent would then create an assessment against the specific individuals of how much they owe the government, both in unpaid taxes and penalties for the balance.

The IRS has also been known to seek injunctions or liens against the individuals that they are investigating. Violations of these court orders could transition the case to a criminal matter under Sections 7201 and 7202 and might result in the government ordering the entire business to shut down.

These consequences may already seem severe, but the government has recently suggested that they are prepared to go even further to address the growing issues caused by payroll tax noncompliance in small businesses across the country.

New IRS Guidance Suggests Stiffer Penalties for Noncompliant Employers

Starting this year, the IRS has instructed agents to pay closer attention to where the unpaid payroll tax revenue went, instead of just focusing on whether it was paid or not. If the agents find that the owner of the employing business kept the money personally or spent it on personal use rather than paying it off, the IRS could move straight to criminal prosecution.

For employers where the payroll tax money was not paid to the government but was instead either paid to or used for the owner’s benefit, revenue officers are instructed to pull the owner’s 1040 income tax returns to see if the money that benefited them was reported as income.

If the money was not picked up as income on the personal tax return, the revenue officer will either submit the returns and investigation records to the civil audit division for assessment of the tax and 75% civil fraud penalty or, if significant enough, simply refer the case to the IRS Criminal Investigation Division to review for criminal tax prosecution.

Small Business Owners Should Be Concerned About More Aggressive IRS Investigations on Payroll Taxes

What this means for business owners and their tax professionals is that seemingly routine payroll tax debt might turn a civil obligation into a criminal tax nightmare in waiting. Criminal tax matters are costly, time-consuming, and can have damaging effects on the individual’s professional and personal reputation. This is true even if the subject of the investigation did nothing wrong.

The best way to approach a more aggressive IRS and prevent these harms in your circumstance is getting out ahead of any potential payroll tax issues. This can be done through a thorough assessment of past filings, instituting reliable accounting practices for current matters, and establishing a diligent record-keeping system for future filings.

If you have already fallen behind on your small business’ payroll tax obligations, it is not too late to act. There are a number of steps that you can take, including voluntary disclosure and payment plan negotiations, that can keep your business profitable while protecting yourself personally from criminal prosecution.

Approaching this process can be very delicate, however, and can actually end up doing more harm than good if done incorrectly. This is why you should always have the assistance of a Dual Licensed Tax Attorney and CPA when handling matters associated with unpaid payroll tax obligations.

Our Dual Licensed Tax Attorneys and CPAs Can Help You Avoid Criminal Tax Prosecution for Unpaid Payroll Taxes

To schedule a reduced-rate initial case assessment, reach out to the Tax Law Offices of David W. Klasing today by calling us at (800) 681-1295 or scheduling online here.

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