On Wednesday, November 16, 2016, 55-year-old Maria Larkin, otherwise known as “Maria Bella-Larkin,” former owner and operator of Las Vegas, Nevada-based healthcare business Five Star Home Health Care Inc., was indicted on charges of attempted tax evasion. The charges stemmed from Larkin’s alleged failure to pay over taxes withheld from employee wages for tax years 2004 through 2009, including income tax, Medicare tax, and social security tax. Larkin then attempted to evade payment of “trust fund recovery penalties” (TFRPs), so-named because taxes withheld from employee wages are withheld in a legally “deemed” constructive trust and thus known as “trust fund taxes.” Larkin was convicted of tax evasion in June 2017, and in January 2018, sentenced by U.S. District Court Judge James C. Mahan to one year (and one day) in federal prison. Additionally, Judge Mahan ordered Larkin to pay more than $1.1 million in restitution, while further imposing a three-year term of supervised release.
The Internal Revenue Code (IRC) creates special tax duties for employers. Specifically, employers are required to collect and pay over various employment taxes, including federal income tax, social security and Medicare taxes, and potentially, the Additional Medicare Tax, depending on how much employees are paid. Once withheld, these taxes are placed into a trust pending payment to the Internal Revenue Service (IRS), giving rise to the term “trust fund taxes.” If an employer deliberately (“willfully”) fails to pay over trust fund taxes, the IRS may assess a trust fund recovery penalty, or TFRP, equivalent to the trust fund tax which consists of the federal income and payroll tax that is withheld from each employees payroll check (difference between the employees gross and net pay). Thus, employers who willfully fail to remit employment taxes, as Larkin was accused and later convicted of, assume full personal financial liability for federal and state taxes that are withheld but not remitted to the federal and state taxing authorities.
These facts are noted in the indictment charging Larkin, which goes into greater detail describing the duties of employers – or, as they are termed in Internal Revenue Manual (IRM) 5.17.7, “responsible persons.” (Interested readers should refer to sections three through five of the indictment, under “Internal Revenue Laws.”) As IRM 22.214.171.124 explains, a person is “responsible” if he or she “had the duty to account for, collect, and pay over the trust fund taxes to the government.” If, in addition to meeting this definition, the person “‘willfully’ failed to collect or pay over trust fund taxes to the government,” he or she is subject to TFRPs. Simply being in a position to choose between paying any company creditor or remitting withheld payroll taxes can exposure you to the trust fund recovery penalty as a responsible person. Typically, company executives, bookkeepers, accountant’s, officers, management and owners face this exposure.
According to a Department of Justice (DOJ) press release announcing the defendant’s conviction in federal court last year, not only did Larkin fail to pay over withheld employment or trust fund taxes from 2004 through 2009; she then concealed her assets and income to evade paying the TFRPs and to obstruct the IRS’s efforts to collect the outstanding taxes, which is a tax crime known as evasion of payment.
Larkin took at least four distinct criminal actions to dodge the IRS’s collection efforts. According to the press release, Larkin “lied to the IRS regarding her ability to pay, changed the name of her business, placed her business in the name of a nominee, [and] had her employees cash checks for her.” During the same period, she also “bought a home in the name of a nominee.”
Though her tax fraud scheme was ultimately unsuccessful, Larkin, through these financial machinations, managed to evade paying “more than $1.6 million in taxes.” For her tax crimes, Larkin was sentenced to one year and one day in federal prison, ordered to serve three years of supervised release, and ordered to pay the IRS restitution totaling $1,153,633.50.
The legal basis for assessing a TFRP against an employer is established by 26 U.S. Code § 6672 (failure to collect and pay over tax, or attempt to evade or defeat tax). Specifically, 26 U.S. Code § 6672(a) provides that, italics our emphasis, any taxpayer “required to collect, truthfully account for, and pay over any tax imposed by this title,” such as an employer, “who willfully fails to [do so], or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”
Though Larkin received a shorter sentence, these “other penalties” may include up to five years in prison in accordance with 26 U.S. Code § 7202, pertaining to penalties for willful failure to collect or pay over tax. The same statute provides for a maximum fine of $10,000. Similar consequences may result from tax evasion under 26 U.S. Code § 7201, which outlines penalties for an attempt to evade or defeat tax: up to five years in prison, and/or a criminal fine of up to $100,000 (unless the defendant is a corporation, in which case the maximum fine quadruples to $500,000).
Taxpayers risk incurring substantial monetary penalties for acts of criminal or even civil tax fraud. To provide just a few examples, various penalties, such as trust fund recovery penalties, accuracy-related penalties, or fraudulent failure-to-file penalties (FFTFs), may be assessed for attempting to evade or defeat a tax, willfully failing to collect or pay over tax, willfully failing to file a return, fraudulently failing to file a return, supply information, or pay tax, engaging in fraud or making false statements, attempting to interfere with the administration of Internal Revenue laws, or conspiring to defraud the United States. In criminal matters, incarceration and supervised release are also potential outcomes.
While it is easy for taxpayers to inadvertently violate the complicated Tax Code, it is advisable to secure good tax counsel to attempt to avoid or mitigate a costly civil or criminal tax controversy by obtaining tax representation services from a skilled and experienced tax controversy attorney licensed to handle municipal, state, federal, and international tax matters, like the Los Angeles tax lawyers at the Tax Law Office of David W. Klasing. In addition to general tax planning and preparation services for individuals, S corporations, C corporations, limited liability companies (LLCs), partnerships, nonprofit organizations, and sole proprietorships, our Irvine tax attorneys also provide aggressive representation for individuals and business entities undergoing IRS audits and criminal investigations.
If you or your business has already been selected for an IRS audit, if you believe that you or your spouse may be under criminal investigation for willful noncompliance, or if you have questions about how to ensure that you or your business comply with the new tax reform bill recently signed into law, turn to our effective and efficient team of California tax attorneys and Business / Tax Accountants / CPAs for timely tax guidance you can trust. We handle tax litigation, business tax issues, IRS tax audits and appeals representation, bookkeeping and accounting for businesses in California, and an array of related financial matters. To arrange a reduced-rate consultation, contact the Tax Law Office of David W. Klasing online, or call our tax law firm today at (800) 681-1295.
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