Anyone who lived through the ‘90s likely remembers the iconic “Soup Nazi,” a recurring character who was frequently featured on the popular sitcom Seinfeld. Hoping to monetize the Soup Nazi’s memorable place in pop culture, shrewd entrepreneurs launched Soupman Inc. to sell gourmet soup with a nod to the famous sitcom. Unfortunately, the company was less successful than the show that helped propel it to fame, filing for Chapter 11 bankruptcy in June 2017. Now, Soupman is making financial news again – only this time, the story involves felony tax crimes. After pleading guilty to one count out of a 20-count tax fraud indictment in Brooklyn federal court last December, former Soupman CFO Robert N. Bertrand, who was charged only a month before the company entered bankruptcy, was sentenced in April to nine months in prison for failure to collect and pay payroll taxes: an act constituting criminal employment tax fraud.
Payroll (Trust Fund, FICA) Tax Requirements for Employers and Corporate Executives
To jog your memory, Bertrand was charged with federal payroll tax evasion in May 2017, as the Department of Justice (DOJ) announced in this press release. In the indictment, which noted no fewer than 20 individual violations of the Internal Revenue Code (IRC), prosecutors alleged that Bertrand failed, in his capacity as the chief financial officer, to collect and pay Social Security taxes and Medicare taxes. To avoid confusion, taxpayers should be made aware that these taxes are alternately referred to as:
• FICA taxes, in reference to the Federal Insurance Contributions Act.
• Payroll taxes, in reference to company payroll records.
• Trust fund taxes, in reference to an employer’s responsibility to hold such taxes until their remittance to the government. This term gives rise to the term “trust fund recovery penalty” (TFRP).
This constitutes a serious violation not only of Bertrand’s corporate responsibilities but more importantly, the IRC or U.S. Tax Code, which, in accordance with 26 U.S. Code § 7202, establishes substantial penalties for “willful failure to collect or pay over tax.” However, before delving into the criminal penalties for payroll tax fraud – which incidentally happens to be one of the most common employment tax evasion schemes, according to the Internal Revenue Service (IRS) – we will backtrack to explain how Bertrand broke the law.
As you are already aware, U.S. taxpayers are generally required to file an annual federal personal income tax return, notwithstanding those taxpayers whose income does not meet the pertinent filing threshold (e.g. single taxpayers under age 65 whose income was below $10,400 in 2017). However, there are additional, equally critical tax requirements for business owners (or financial officers), who, with some exceptions, must typically (1) withhold, (2) match, and (3) deposit payroll taxes. To reiterate, this includes:
• Medicare Tax – Rate of 1.45%
• Social Security Tax – Rate of 6.2%
Depending on their employees’ income, employers may also need to withhold, match, and deposit a subset of the Medicare Tax aptly known as the “Additional Medicare Tax,” which is a 0.9% tax on wages exceeding $200,000. These rates, plus additional information concerning each, are noted under IRS Topic No. 751.
9 Months in Prison, Over $75K in Fines for Soupman CFO Guilty of Payroll Tax Fraud
Equipped with this background information about the Tax Code, it is easier to understand how the following actions were undertaken by Bertrand, as described by a second DOJ press release issued in April after his sentencing, constitute violations of the law:
1. “Between 2010 and 2014, Bertrand made unreported payments to Soupman employees,” some of whom were paid “in large unreported stock awards.”
2. Bertrand failed to report the stock awards.
3. Additionally, Bertrand “never paid Medicare, Social Security and federal income taxes” on the stock awards – even though an auditor warned him to take corrective action with the IRS as far back as 2012.
Through these actions (or lack thereof), Bertrand caused a tax loss amounting to approximately $593,000. He was ordered to pay restitution totaling just under $78,520, sentenced to nine months in federal prison, and ordered to serve one year of supervised release upon completion of his prison term. Remarking on the case, Special Agent-in-Charge James D. Robnett of the IRS Criminal Investigation Division (IRS-CI) stated, “Corporate executives such as Mr. Bertrand have a responsibility to collect and turn over all IRS withholding taxes. His failure to withhold and pay over is a clear violation that directly impacts those employees of Soupman Inc. and U.S. taxpayers now and in the future. Today justice is served, and Mr. Bertrand is being held accountable for his criminal actions.”
Though the outcome was hardly “positive” for the defendant, executives and employers should note that Bertrand’s sentence could have been far harsher: up to 60 months in prison, and/or criminal fines of up to $10,000 (in addition to IRS restitution and attorney fees), which are the statutory maximums established by the aforementioned payroll tax evasion statute, 26 U.S. Code § 7202 (willful failure to collect or pay over tax).
Payroll and Employment Tax Fraud Defense Attorneys Serving Corporations and Partnerships
If you are an employer, a corporate officer, a corporate director, a corporate shareholder, a board member, or the member of a partnership, or it could be considered a responsible party within a Professional Employer Organization (PEO) or Payroll Service Provider (PSP), this is information that directly concerns you. As the IRS cautions in its overview of employment taxes and the TFRP, any of the aforementioned individuals can be held responsible for collecting, withholding, and paying FICA taxes – and if such a party willfully fails to meet this obligation, he or she risks criminal prosecution, debilitating fines, and restitution, incarceration in federal prison, supervised release, a felony record, and in many cases, the irreversible destruction of a longstanding career.
The IRS has made payroll and employment taxes an enforcement priority, which means it is only a matter of time before the responsible party’s noncompliance is detected – and penalized. If you have any questions or concerns about your responsibilities regarding payroll, FICA, or trust fund taxes, the time to address them is now. Fortunately, dependable guidance from an experienced business tax lawyer is only a phone call or mouse-click away. To schedule a reduced-rate consultation with a California employment tax attorney or criminal tax defense attorney concerning payroll tax issues, contact the Tax Law Office of David W. Klasing online, or call (800) 681-1295 for assistance.
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 in San Bernardino, Santa Barbara, Panorama City, San Jose and Oxnard! You can find information on all of our offices here.
Helpful Q and A Library
Employment Tax Q and A Library
California Employment Taxes Basics https://youtu.be/4Y8gz1GYuRo
Employment Tax Representation https://youtu.be/eXaWAgvagn4
What Civil and Criminal Penalties Can Apply? https://youtu.be/NqB7G5xkvow
What is the Trust Fund Recovery Penalty? https://youtu.be/T0cfuplRZEA
What Factors do Courts Consider in Determining a Responsible Party? https://youtu.be/1RmYYqbd9VI
What Happens when you Continue to Fail to Pay Employment Taxes? https://youtu.be/jZxvaXLXKVc
Examples of Court Determinations of the Trust Fund Penalty https://youtu.be/zZQiy9UUNcc