Employers serve as tax collectors under the Internal Revenue Code: In addition to paying its own FICA and FUTA obligations, an employer must withhold FICA and income tax from its employees’ pay. See I.R.C. §§ 3102 (FICA “shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid”); 3402 (“every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by the Secretary”).
For good measure, Congress included a mechanism to ensure compliance; if an employer fails to withhold and pay over the tax, responsible parties affiliated with the employer can be assessed with the trust fund recovery penalty under section 6672 of the Code, which makes these individuals liable if they willfully fail to assure that the taxes are paid.… Read More
When an employer fails to withhold and pay over FICA and income taxes from employees’ wages, individuals associated with the business may be subject to liability for the employer’s tax obligations under section 6672(a) of the Internal Revenue Code, which imposes the trust fund recovery penalty. Specifically, “the officers or employees of the employer responsible for effectuating the collection and payment of trust-fund taxes who willfully fail to do so are made personally liable to a ‘penalty’ equal to the amount of the delinquent taxes.” Slodov v. United States, 436 U.S. 238, 244-45 (1978). Liability is therefore tied to two distinct requirements: First, the individual must be “responsible,” and second, he must act willfully.… Read More
Employers are required to deduct federal income tax from employees’ paychecks. I.R.C. § 3402(a)(1). While the employer will be liable if it fails to withhold, I.R.C. § 3403, in cases where the employees were improperly classified as independent contractors, the prospect exists that they have independently paid their income taxes directly after receiving a 1099. As a consequence, the Internal Revenue Code provides a partial defense to the employer: The employer will not be liable for income taxes to the extent that the improperly classified employees paid them, but will remain liable for any interest and penalties associated with its failure to deduct the taxes from the employees’ wages.… Read More
Roughly seventy percent of the federal government’s revenues come from employment taxes, including FICA and income taxes withheld from employees’ wages. Consequently, threats to that source are taken quite seriously. All employers need to be aware of the significant changes in employment tax enforcement that have increased the risks faced by the non-compliant.
Traditional Employment Tax Enforcement
Historically, the failure of an employer to comply with its employment tax obligations was generally treated as a civil tax problem to be handled by the IRS. A typical payroll tax case involved penalties for the delinquent employer. If the taxes were not paid promptly, responsible individuals would be assessed with the trust fund recovery penalty, which applies to “[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof.” I.R.C.… Read More
Employers are required to withhold FICA and income tax from employees’ pay checks and make periodic deposits of the amounts withheld. If the taxes are not withheld and paid over to the IRS, the employer is subject to monetary penalties and individuals affiliated with the employer may face personal liability for the trust fund recovery penalty. See I.R.C. §§ 6656 (employer penalty); 6672 (trust fund recovery penalty).
The failure “to collect, account for, and pay over” these taxes is also a felony. I.R.C. § 7202. While payroll tax violations were rarely prosecuted historically, times have changed, and the Tax Division has made employment tax prosecutions a priority.… Read More
Cases challenging the classification of workers as independent contractors have been a significant enforcement priority for both the IRS and the Department of Labor. On May 10th, the United States District Court for the Eastern District of Pennsylvania granted summary judgment to a business seeking a refund of employment taxes it paid after the IRS challenged the classification of its workers as independent contractors. Nelly Home Care, Inc. v. United States, Nos. 15-439 & 15-444, 2016 U.S. Dist. LEXIS 61524 (E.D. Pa. May 10, 2016). The case is of particular interest because the taxpayer did not qualify for one of the statutory safe harbors under Section 530 of the Revenue Act of 1978 but nonetheless prevailed by demonstrating “other reasonable basis” to support the classification decision.… Read More
An individual who has been assessed with the trust fund recovery penalty for failure to collect, account for or pay over employment taxes generally cannot obtain review in Tax Court. Instead, judicial review is available by means of a refund claim, which can be heard either in district court or the Court of Federal Claims. Normally, jurisdiction over a refund action requires full payment of the tax. Flora v. United States, 362 U.S. 145, 150 (1960). For someone who is challenging the imposition of the trust fund recovery penalty, this rule is relaxed: because the tax is divisible, jurisdiction is established if the plaintiff has paid the withheld tax for one employee for one quarter.… Read More
We recently had the pleasure of speaking with Marie Sapirie of Tax Analysts on two areas of tax enforcement: employment taxes and international compliance programs. Marie’s story ran in the February 1, 2016 edition of Tax Notes; you can access it here.
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Speaking at the ABA’s Annual Criminal Tax Fraud and Tax Controversy Conference, senior officials from the Tax Division of the Department of Justice (DOJ) and the IRS Office of Chief Counsel described a variety of priorities for civil enforcement.
Consistent with prior indications that payroll taxes will be a significant area of focused criminal enforcement, Diana L. Erbsen, Deputy Assistant Attorney General for Appellate and Review, indicated that practitioners should anticipate civil actions for injunctive relief in payroll tax cases, followed by contempt proceedings to enforce those injunctions. Erbsen also indicated that the Financial Litigation Unit of the Office of Review, which focuses on collecting tax judgments, has received additional staff and is expected to be more active.… Read More
Speaking on a panel this morning at the New England IRS Representation Conference, several Washington IRS executives discussed the Service’s current initiatives. We heard from Mary Beth Murphy, Deputy Commissioner, Small Business/Self-Employed Division; Rajive Mathur, Director of Online Services; Carole Madison, Acting Director of Examination, North Atlantic Region; and Darren Guillot, IRS Director of Field Collections. Below are some of the highlights from their discussion.
Employment Tax Compliance
As we have discussed before, one of the IRS’s stated enforcement priorities is employment tax compliance. According to Mr. Guillot, employer withholding of income and payroll taxes accounts for approximately 70 percent of the nation’s tax revenue.… Read More