According to a Department of Justice press release, a New Hampshire man was sentenced to two and a half years in federal prison for willfully failing to pay over $14 million in payroll taxes to the IRS and for failing to file his personal tax returns for many years. This case highlights the serious repercussions that business owners and those responsible for payroll face when they fail to comply with federal tax obligations. If you, or your company, filed fraudulent payroll returns, paid employees in cash without issuing W2’s or 1099’s or have not filed required employment tax returns, it is imperative to meet with an experienced employment tax attorney before the IRS takes potentially criminal tax enforcement action.
Defendant Withheld Payroll Taxes but Failed to Remit Them to the IRS
Court records reveal that Andrew Park, 49, of Bedford, New Hampshire, was the co-founder and CEO of a startup tech company and had full control over the company’s financial affairs, including payroll. As part of his responsibilities, Park was required to file quarterly employment tax returns and remit payroll taxes to the IRS, including both the employee withholding amounts and the employer’s portion of Social Security and Medicare taxes.
From 2014 through the third quarter of 2021, Park’s company withheld federal income tax, Social Security tax, and Medicare tax from employees’ paychecks but failed to pay those amounts over to the IRS as required by federal law. He also failed to remit the company’s own share of Social Security and Medicare taxes.
Despite hiring a payroll service provider to process employee payroll, Park ignored repeated communications that employment taxes were due to the government. On multiple occasions, he was warned by the hired payroll company that the required tax payments had not been made. Additionally, one employee directly notified Park that her W-2 showed a Social Security tax payment that did not match what was reported to the government, clearly indicating that payroll tax deposits had not been made.
Failure to File Individual Tax Returns Despite High Income
In addition to failing to pay over employment taxes, Park also failed to file his personal tax returns from 2013 through 2020, even though he received a salary of approximately $250k per year. Under federal law, individuals earning above a minimum threshold are required to file an annual income tax return.
Legal Consequences of Payroll Tax Violations and Failure to File Returns
Park’s failure to remit payroll taxes and failure to file his individual income tax returns resulted in a total tax loss exceeding $14 million to the IRS. He was sentenced to two and a half years in federal prison and ordered to serve three years of supervised release upon completion of his physical incarceration. Additionally, Park was ordered to pay $639,821 in restitution to the U.S. government, along with a $15,000 fine.
Payroll tax fraud is one of the most heavily prosecuted offenses, as the government considers withheld payroll taxes to be trust fund taxes (meaning that employers are considered to hold such funds in trust for the federal government). When employers fail to pay over these funds, they are effectively using government money for their own benefit, which federal prosecutors aggressively pursue.
Understanding Payroll Tax Obligations Under Federal Law
Federal law imposes strict requirements on employers when it comes to withholding and remitting payroll taxes. Under the Federal Insurance Contributions Act and Federal Unemployment Tax Act, employers are required to:
- Withhold payroll taxes from employees’ wages, including federal income tax, Social Security tax, and Medicare tax.
- Deposit withheld taxes with the IRS, along with the employer’s matching share of Social Security and Medicare taxes.
- File quarterly payroll tax returns (Form 941) to report payroll taxes and annual unemployment tax returns (Form 940).
- Keep accurate payroll records and provide employees with correct W-2 forms each year.
Failure to meet these obligations can result in severe civil and criminal penalties, including fines, restitution orders, and imprisonment.
How the IRS Detects Payroll Tax Fraud
The IRS actively investigates payroll tax violations through a combination of automated reporting systems and direct audits. Some common red flags that trigger IRS enforcement actions include:
- Payroll tax returns (Form 941) showing withheld taxes but no matching deposits to the IRS.
- Inconsistent Social Security and Medicare contributions between employer reports and employee W-2s.
- Employer accounts showing a history of unpaid payroll taxes.
- Complaints from employees about missing or incorrect payroll tax contributions.
In Park’s case, both his payroll provider and an employee reported issues, which likely contributed to the IRS investigation that led to his prosecution, conviction, and sentencing.
What to Do if You Have Unpaid Payroll Taxes or Unfiled Tax Returns
For business owners and individuals who have unpaid tax liabilities or unfiled tax returns, taking immediate action is highly advisable. The IRS provides options for taxpayers to resolve their issues before facing criminal tax prosecution, including voluntary disclosure programs, installment agreements, and offers-in-compromise. Waiting until the IRS contacts you often eliminates these options and can increase the risk of criminal charges.
The sentencing of Andrew Park provides an example of the serious legal consequences of failing to remit payroll taxes and failing to file individual income tax returns. If you are facing payroll tax issues or have unfiled tax returns, the best course of action is to consult with an experienced tax attorney immediately. Addressing these compliance concerns as early as possible can prevent an audit or civil enforcement from escalating into a criminal investigation. Taking a proactive approach is always preferred over waiting for the IRS to take action.
