Business owners have a tremendous amount of responsibility ranging from ensuring the business is successful to performing the administrative and regulatory tasks required by law. One such task is ensuring that employees are properly paid and along with that, payroll taxes are properly withheld. As payroll taxes and their compliance are near the top of the IRS’s list of priorities, enforcement of such laws can result in taxpayers facing serious criminal and civil penalties for noncompliance.
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Business Owner Failed to Collect and Pay Over Payroll Taxes, Pleads Guilty
According to a Department of Justice press release, Zhi Hui Zheng, the owner of multiple clothing businesses in Brooklyn, pleaded guilty last week to charges relating to the failing to collect, account for, and pay over payroll taxes. According to prosecutors, Zheng did not collect or remit payroll taxes for his employees for more than four years, beginning in 2012.
The IRS and prosecutors estimated that Zheng’s failure to comply with payroll tax laws resulted in a tax loss of just under $690,000. Sentencing is scheduled for January of 2020 and Zheng faces up to five years in prison. Additionally, Zheng faces a term of supervised release after a potential prison sentence is completed. Lastly, he will likely be ordered to pay restitution to the IRS which is non dischargeable in bankruptcy.
Payroll Tax Law Requirements
Business owners and certain employees are responsible for ensuring that taxes are collected, accounted for, and remitted to the IRS. A common misconception among business owners is that payroll tax evasion or fraud applies only when an employer withholds funds from the paycheck of an employee and subsequently fails to pay over the funds that were collected. In actuality, even employers who do not withhold payroll taxes can be prosecuted for payroll tax evasion and related crimes. In other words, you do not need to misappropriate the payroll taxes that are collected from employees’ paychecks to be convicted of payroll tax evasion.
After reviewing the requirements and obligations under the payroll tax laws, it is easy to see that there is more than one way that a business owner or employee who is responsible for payroll can find themselves on the wrong side of the tax laws. For instance, an employer who misclassifies their workforce as contractors, rather than employees, may face an investigation for payroll tax-related offenses as payroll taxes would not have been withheld from the paychecks of contractors. Thus, it is critical that business owners evaluate their exposure to payroll tax laws in a holistic manner. An experienced tax defense attorney can be an extremely valuable resource in identifying areas of exposure, as well as assisting in the event of a payroll tax audit or investigation.
Potential Section 530 Relief for Worker Misclassification Cases
In the case of a worker misclassification that leads to payroll taxes that were not withheld or paid over, an experienced tax attorney will help you explore the possibility of Section 530 relief. Taxpayers are granted relief from the payroll tax liability associated with worker misclassification if three elements are met:
- The employer has filed all federal tax returns (“reporting consistency”);
- The employer has treated all similarly situated workers as independent contractors (“substantive consistency”); and
- The employer has a reasonable basis for not treating the worker in question as an employee (“reasonable basis”).
Your tax attorney will review the facts of your particular case to determine whether these three elements are met. If they are not, there are still other strategies that may be employed to help reduce the potentially negative effects of payroll tax noncompliance.
Contact an Experienced Tax Attorney Today
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have worked with business owners of companies ranging in size from large too small. If you have received notice from the IRS or state taxing authorities that your payroll tax withholding, accounting, and remittance procedures are being scrutinized, our team of zealous advocates will help you develop a legal strategy aimed at preserving the integrity of you and your business. Do not let the threat of a criminal tax investigation or prosecution keep you up at night. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
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.
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