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Employment
Taxes, Trust
Fund Recovery Penalty,
Civil
and Criminal Exposure - Dept. Of Justice News
When
an employer willfully fails to pay over employment taxes, in addition
to the Civil Trust Fund Penalty, the Justice Department can pursue
felony criminal prosecution.
On
April 17, 2017, the Justice Department issued a news release (which is
copied below) on this subject. The
fact that the Justice Department issued this warning about criminal
prosecution should be a wake up call to both taxpayers and tax
practitioners.
The
Release follows:
FOR
IMMEDIATE RELEASE
Tuesday,
April 18, 2017
Justice Department Continues To Sue, Prosecute
Delinquent Employers
The
Justice Department Continues its Employment Tax Enforcement Push by
Bringing Civil and Criminal Enforcement Actions Against Employers and
Individuals Who Violate Employment Tax Laws
Many
Americans associate April with “Tax Day” and the annual deadline
for filing individual income tax returns. But the end of April is also
the first deadline for employers to file quarterly employment tax
returns. Those who do not comply with filing requirements or who fail
to pay the taxes withheld from their employees’ wages face civil
lawsuits or criminal prosecutions as part of the Department of
Justice’s ongoing focus to enforce employment tax laws using all
tools available.
Employers
in the United States are required to collect, account for and pay over
to the Internal Revenue Service (IRS) tax withheld from employee
wages, including federal income tax and social security and Medicare
taxes. Employers also have an independent responsibility to pay their
matching share of social security and Medicare taxes.
“Employers
who willfully fail to comply with their employment tax obligations are
cheating the U.S. Treasury at the expense of taxpayers, such as
law-abiding employers and employees, who pay their taxes on time and
in full,” said Acting Assistant Attorney General David A. Hubbert of
the Justice Department’s Tax Division. “The Department is
committed to holding employers that willfully fail to pay their
employment taxes accountable with, as appropriate, criminal
prosecution, bringing these offenders into compliance through civil
injunctions, and working with the IRS to collect what is owed.”
“Employment
taxes are a critical part of the tax system, generating more than $1
trillion a year in payments to the government, and the IRS works
closely with employers and the payroll community to help ensure
compliance in this area,” said IRS Commissioner John Koskinen. “We
want to help employers avoid problems in the employment tax area. When
problems do arise, we use civil enforcement tools and, when
appropriate, work closely with the Justice Department in the pursuit
of criminal cases. The collection of employment taxes is a priority
area for the IRS and helps ensure fairness for employers and
taxpayers. Employers who fail to pay or withhold these taxes enjoy an
unfair economic advantage over those who comply with the tax laws.”
Willful
Failure to Comply with Federal Employment Tax Laws is a Crime
An
individual’s willful failure to comply with employment-tax
obligations is not simply a civil matter. Employers whose business
model is based on a continued failure to pay employment tax, who use
withheld employment taxes as a slush fund to pay personal expenses or
other creditors, who pay employees in cash to avoid employment tax
obligations, or who file false employment tax returns are engaging in
criminal conduct and face prosecution, imprisonment, monetary fines
and restitution.
Recent
prosecutions include:
Employers
who “pyramid” taxes by opening successive businesses
In
January, Napoleon Robinson of Lauderhill, Florida, was sentenced
to serve 18 months in prison for evading more than $500,000 in
employment taxes. Robinson owned and operated a series of ship welding
and repair businesses in Virginia and New York. Robinson was not
paying over employment taxes and would close down one company and open
a new one in the name of a nominee owner, while continuing to run the
company, making its financial and personnel decisions and controlling
the businesses’ bank accounts. He was also ordered to pay
restitution to the IRS.
In
January, two West Virginia business owners, Michael and Jeanette
Taylor, were sentenced
to serve 21 and 27 months in prison for failing to pay over more than
$1.4 million in employment taxes. The Taylors owned a construction
business that transported steel and sold gravel and concrete. They
changed the name of their business several times, though the
operations of the business remained the same. Both were responsible
for collecting, accounting for and paying over the employment taxes
withheld from their employees’ wages. Instead of paying over the
taxes that they collected, the Taylors used the funds to purchase
property and finance their horse farm. They were also ordered to pay
restitution to the IRS.
Employers
using withheld employment taxes for personal expenses
In
January, Paul Harvey Boone of Hillsborough, North Carolina, was sentenced
to serve 15 months in prison for failing to pay over employment taxes.
Boone owned and operated Boone Audio Inc. From 2008 through 2011,
Boone used company funds for personal expenses while failing to pay
over the employment taxes withheld from his employees’ wages. He was
also ordered to pay restitution to the IRS.
In
December 2016, Sreedar Potarazu, a Maryland surgeon and entrepreneur, pleaded
guilty to failing to account for and pay over $7.5 million
in employment taxes and to shareholder fraud. Potarazu founded
VitalSpring Technologies Inc., a corporation that provided data
analysis and services related to health care expenditures. Potarazu
was responsible for collecting, truthfully accounting for and paying
over VitalSpring’s employment taxes. Instead of paying over the
employment tax, Potarazu spent millions on personal expenses including
transferring funds to himself and others, travel, car service and the
publication of a book.
Employers
using employment taxes to pay other creditors
In
January, Steven Lynch, a tax attorney and owner of the Iceoplex in
Pittsburgh, Pennsylvania, was sentenced
to serve 48 months in prison, fined $75,000 and ordered to pay
restitution to the IRS of more than $793,000, after being convicted of
failing to collect, account for and pay over employment taxes. Lynch
co-owned and operated the Iceoplex, a recreational sports facility
which included a fitness center, ice rink, soccer court, restaurant
and bar. He controlled the finances for these businesses and was
responsible for collecting, accounting for and paying over tax
withheld from employee wages and timely filing employment tax returns.
Lynch failed to pay over more than $790,000 in employment taxes
withheld.
In
June 2016, Muzaffar Hussain of Pleasanton, California, pleaded
guilty to failing to account for and pay over employment
taxes for Crossroads Home Health Care Inc. Hussain was the CFO and was
responsible for filing the company’s employment tax returns and
paying over the employment taxes. Hussain transferred funds in an
amount equal or close to the amount of employment taxes from the
business bank account into other accounts and used the money to fund
other business and personal expenses.
Employers
paying employees in cash to avoid employment tax
In
September 2016, Phillip Hui of Sicklerville, New Jersey, was sentenced
to serve 15 months in prison for conspiring to evade payroll taxes on
cash wages paid to illegal immigrants employed at his dry cleaning
business. Hui hired foreign nationals from Mexico and Guatemala who
did not have legal status in the United States and paid them in cash.
Their wages were not reported on the quarterly employment tax returns
filed with the IRS. He was also ordered to pay restitution to the IRS.
Employers
filing false employment tax returns
In
March, Richard Tatum, a Houston, Texas, business owner of an
industrial staffing company, pleaded
guilty to failing to pay more than $18 million in
employment taxes. Tatum filed false employment tax returns that did
not report the majority of his employees and did not pay over the
taxes he withheld from his employees. stead, he used the money for
luxury travel and to make payments on his ranch.
In
January, Janis Ann Edwards, an Oklahoma City, Oklahoma, business
owner, pleaded
guilty to evading more than $3.5 million in employment
taxes. Edwards was the sole owner of Corporate Resource Management c.
and a number of related companies that operated as professional
employer organizations. Edwards directed her employees to alter
quarterly employment tax returns to reflect less payroll tax liability
than was actually owed.
Delinquent
Employers Also Risk Injunctions and Money Judgments
The
Tax Division is also aggressively pursuing civil enforcement action
against those who fail to meet their employment tax obligations. Since
2003, the Division has permanently enjoined more than one hundred
employers and obtained tens of millions of dollars in money judgments.
Civil injunctions are court orders requiring the employer and
principal officers to timely deposit and pay employment taxes to the
U.S. Treasury. These court orders also impose various other
requirements and prohibitions, including the obligation to provide
notice of each deposit to the IRS, as well as restrictions on opening
and operating new businesses and transferring or dissipating assets.
In
recent years, the Tax Division increased the number of civil actions
brought against employers who violate employment tax laws. In 2016,
the Tax Division obtained employment tax injunctions against 38
employers—more than double the number of injunctions obtained in
2015. The injunctions obtained in the past year include court
orders against employers throughout the United States, such
as a St. Louis concrete business, a Florida restaurant, an Iowa lawn
care business and a Michigan custom kitchen company.
Since
Jan. 1, the Tax Division filed 17 suits, collectively seeking more
than $10 million in unpaid employment taxes, against tax-delinquent
medical-care providers who, despite IRS notices and efforts to
collect, have been non-compliant for three or more quarters, despite
persistent attempts by the IRS to remind them of their obligations and
to collect the unpaid taxes.
These
17 suits collectively seek more than $10 million in unpaid employment
taxes and are part of an ongoing effort by the Justice Department and
the IRS focusing on employment tax compliance. Among these cases is a
suit filed in federal court in Minnesota to enjoin Dawda Sowe and
Nurse Staffing Solutions Health Care from failing to pay employment
taxes and to obtain a $2 million judgment against the business for
employment taxes the business allegedly failed to pay over an
eight-year period. Also, this month the Tax Division filed suit in
federal court in Texas to obtain a court order requiring Jeanna Smith
to timely file employment and unemployment tax returns for her
business and pay those taxes in full, amongst other requirements. In
this suit, the government also seeks a judgment for unpaid employment
taxes and alleges that Smith incorporated several home-health care
businesses, such as Paris Senior Care Group Inc., which accumulated
more than $1.3 million in unpaid employment taxes.
Those
Who Violate Injunctions are at Risk for Civil and Criminal Contempt
Those
who violate an injunction can be charged with civil and criminal
contempt and face being shut down, paying compensation for the damage
the contempt caused and incarceration of the principal officer(s). For
example, a federal court in Washington held
Dr. James Hood and his wife, Karen Hood, in contempt of court for a
consistent pattern of failing to meet their tax obligations. The court
later ordered the two to close their dental care businesses, cease
operating as employers, and barred them from opening any new
businesses where the Hoods would serve as employers by June 8, 2017.
Liability
Extends to Responsible Individuals
Any
individual who is responsible for ensuring that employment taxes are
collected, truthfully accounted for, and paid over to the IRS, and
willfully fails to do so or willfully attempts to evade or defeat
paying employment taxes may be subject to a civil penalty equal to the
amount of the unpaid withholdings. This civil penalty, referred to as
the trust fund recovery penalty, may be imposed even if the individual
uses the employment tax to pay other creditors or keep the business
afloat. Individuals subject to these penalties include, but are not
limited to, corporate officers, treasurers, manager, and, in some
circumstances, bookkeepers.
Since
January 2013, the Tax Division has obtained tens of millions of
dollars in money judgments against individuals subject to these
penalties. For example, in July 2016, a Florida jury found the CEO and
owner of a professional employer organization, David Goldberg of
Deerfield Beach, Florida, personally liable for more than $4.2 million
due to his failure to pay his company’s employment taxes. In
addition, in December 2016, the U.S. Court of Federal Claims found
that the CFO of an Internet-marketing platform, Mark V. Noffke, was
responsible for his company’s failure to pay its employment taxes
and entered a judgment of more than $500,000 against him. And in
April, a federal court found the co-manager of an architectural
woodwork installation company, Darren Commander of Jackson, New
Jersey, personally liable for $1.9 million due to his failure to pay
his company’s employment taxes.
These
cases reflect the ongoing commitment of the Department of Justice and
the IRS to pursue companies and individuals who fail to collect,
account for, or pay employment taxes to the IRS. For more information
about civil and criminal employment tax enforcement efforts, visit the
Tax Division’s website.
Topic(s):
Tax
Component(s):
Tax
Division
Press
Release Number:
17-416
Updated
April 18, 2017
Above
is a copy of Justice News, and the source is: https://www.justice.gov/opa/pr/justice-department-continues-sue-prosecute-delinquent-employers
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