The IRS has been forced to make some difficult decisions regarding its enforcement priorities in recent years. Due to decreased funding levels that has resulted in fewer agents and enforcement personnel, the IRS has had to make difficult choices about where to direct its audit and tax enforcement resources. The IRS has long targeted wealthy and high-income taxpayers with its “Wealth Squad.” However, recent guidance from the Treasury Inspector General (TIGTA) indicates that the IRS has likely under allocated resources to identify and combat payroll tax evasion by businesses throughout the nation. TIGTA seems to indicate that the IRS is missing “egregious” employment tax fraud cases that are likely to result in a positive return on its enforcement dollar.
The TIGTA report recognizes the payroll tax noncompliance is a growing problem. The report found that as of the close of 2015, 1.4 million employers were collectively responsible for approximately $45.6 billion in unpaid employment taxes, interest, and penalties.
The report also notes apparent egregious and continuing tax violations by a relative handful of businesses. The report found that just under 60 taxpayer accounts had been assessed the trust fund recovery penalty for payroll tax noncompliance for ten or more businesses or other entities. However, less than 10 percent of these apparent serial offenders were referred and investigated by IRS-Criminal Investigations. It is unclear why criminal referral rates have been so low up to this point. However, in the wake of this report, taxpayers should expect significantly stepped-up enforcement efforts.
In fact, the report makes a number of audit and enforcement suggestions. One suggested change by TIGTA would address IRS criteria for referring criminal cases to IRS -CI. TIGTA has recommended the IRS to expand its criteria to include taxpayers owing more than $1 million in payroll taxes. TIGTA has also urged the IRS to expand its criminal referral criteria to also include taxpayers with ten or more noncompliant entities. While the IRS has pushed back to some degree on these recommendations, it has already consented to devoting resources to develop a focused enforcement and collections strategy regarding these accounts.
While the IRS has yet to develop and implement its plan to step-up payroll tax enforcement, it apparently timed the announcement of a guilty plea in a major payroll tax case to signal its commitment to a renewed enforcement focus. Taxpayers and business owners with payroll tax concerns should not delay seeking guidance to fix compliance errors. This enforcement action targets a rapidly growing industry: temporary staffing and job placement firms.
Richard Floyd Tatum Jr., 57, was the owner of Associated Marine & Industrial Staffing Inc. Mr. Tatum’s business employed roughly 1,000 workers and handled all aspects of their employment payroll taxes. The company was responsible for accounting for, collecting, and turning over employment trust fund taxes to the U.S. government. Unfortunately, Mr. Tatum’s efforts at payroll tax compliance were less than thorough.
Starting in March 2008 and continuing until December 2009, Mr. Tatum failed to file payroll tax returns. When he did file, the information contained within the reports did not accurately reflect the full scope of Associated Marine’s employees because it did not include external employees. After failing to timely file returns from March 2010 to December 2012, Associated Marine filed an untimely return in May of 2013 but did not pay any obligations that were due and owing. In fact, Mr. Tatum failed to turn over to the government the more than $12 million dollars in trust fund taxes that the company had accounted for and collected.
Mr. Tatum recently pleaded guilty to these allegations. He is scheduled to face sentencing in June 2017. He could face up to five years in prison and monetary penalties which includes the trust fund recovery penalty. The trust fund recovery penalty can result in a taxpayer being personally liable for the full amount of unpaid payroll tax.
Businesses that have settled into complacency regarding payroll tax obligations should expect for enforcement efforts to significantly increase in the near future. Taxpayers and businesses that get ahead of the problem prior to an audit or enforcement action are more likely to be able to mitigate penalties and consequences.
The tax lawyers of the Tax Law Offices of David W. Klasing may be able to assist your business with its federal and California payroll tax concerns. As a dually certified tax attorney and CPA, Mr. Klasing can put his experience as a former public auditor to work for your business. To schedule a confidential, reduced rate initial consultation, please call our Los Angeles or Irvine tax law office at 800-681-1295 today or schedule online today.