Walking the Line: Common Pitfalls in Civil and Criminal Employment Tax Cases
Department of Justice and the IRS have announced a renewed emphasis on both civil and criminal payroll tax enforcement lawsuits. This article provides a short overview of what an employment tax case is and identifies reoccurring problems in representing clients with potential employment tax issues.
Overview
The term “employment taxes” is a shorthand reference to the Federal Insurance Contributions Act (“FICA”) taxes that employers are required to withhold from their employees’ paychecks and thereafter remit to the IRS on a quarterly basis. Payroll taxes are reported on IRS Form 941, Employer’s Quarterly Federal Tax Return. Because employers are responsible for withholding the taxes from their employees and paying those funds over to the IRS, payroll taxes can improperly serve as a short-term bridge loan which helps keep businesses afloat.
While there are no precise statistics on the number of payroll tax cases brought each year by the IRS, anecdotal evidence suggests that their frequency is on the uptick. One reason that the IRS has placed renewed emphasis in this area has been criticism by the Treasury Inspector General for Tax Administration (“TIGTA”). In a report issued in 2017, TIGTA noted that the IRS had identified 137,272 cases involving shortfalls between tax deposits reported on tax forms and deposits actually made, but the IRS only worked 17% of the cases. The remaining 83% had a potential underreported tax difference of more than $7 billion. The report also criticized the IRS for case selection (i.e., not selecting the high-dollar cases) and failing to pursue repeat offenders.
Anecdotal evidence of the IRS’s employment tax push can also be seen by the Third Circuit, which handed down two non-precedential opinions involving employment tax liabilities this year. Further, Don Fort, the Chief of IRS-Criminal Investigations, stated that the IRS plans to expand its enforcement efforts in criminal employment tax cases.
A host of scenarios could cause a company to land on the IRS’s radar for failing to remain current with its quarterly payroll tax requirements (i.e., such as the cases referenced in the TIGTA report). A Form 941 could demonstrate that quarterly deposits are less than the amounts reported, the IRS may learn that a company has misclassified its employees as independent contractors, or employers may simply fail to file Forms 941. Audits may occur where an employer is sued for wage and hour violations or is the subject of an Immigration and Customs Enforcement raid. Some employers, like hotels and restaurants, may be flagged for a state sales tax audit. Finally, employees, business partners, or aggrieved ex-spouses may even inform on employers through the IRS’s whistleblower program, which provides cash rewards to individuals who alert the IRS about tax fraud.
Given the large number of ways in which an employment tax case can arise, practitioners need to be aware when these issues are lurking in the background. Further, the thin line between a civil matter and a criminal matter makes providing straightforward advice challenging and requires practitioners to identify and navigate several difficult issues.
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“Walking the Line: Common Pitfalls in Civil and Criminal Employment Tax Cases,” by Jed M. Silversmith and Stephen J. Pieklik* was published in the September 2018 issue of For the Defense (Vol. 3, Issue 3), a publication of the Pennsylvania Association of Criminal Defense Lawyers. Reprinted with permission.
* Stephen Pieklik is a partner at the law firm of Williams Coulson and works in Pittsburgh.