Employment Taxes: The Federal Government Crackdown
Employers are required to withhold employment taxes from the paychecks of employees who work for them. Employers must file regular reports and pay the taxes that are due. In some cases, however, employers fail to fulfill withholding obligations and fail to make reports and payments on time.
Employers beware: The Internal Revenue Service and the Department of Justice is now teaming up to crackdown on failure to comply with employment tax rules.
The consequences of this crackdown could be serious for companies and small business owners especially. It is common to make innocent mistakes with such a complex tax code, but the penalties and consequences of not following the rules can be financially devastating.
A Washington DC business tax attorney should be consulted to understand employment tax obligations and for help if you are concerned your company has not been following the rules.
Crackdown on Failure to Comply with Employment Tax Rules
The United States tax system is set up as a pay-as-you-go system. To make sure revenue is flowing steadily and ensure people don't face a big tax bill at the end of the year with no way to pay, money must be withheld directly from employee paychecks before those checks are received.
Employers have to send in this money and a report of the withholding of not just federal income taxes, but also taxes collected under the Federal Insurance Contributions Act (FICA) and hospital insurance taxes. FICA and hospital insurance taxes fund Social Security and Medicare.
Taxes withheld from the wages of employees and submitted by companies account for around 70 percent of total annual revenue that the IRS collects each year. Yet, despite the substantial amount of money companies are sending to the agency, as much as $59 billion in tax reported on employment tax returns has gone unpaid and underreporting and underpayment of employment tax account for $72 billion of the total tax gap within the United States.
The IRS and DOJ will now be working together to try to stop companies from failing to meet their employment tax obligations.
The IRS is contacting employers sooner to try to assist them in compliance; civil litigation and injunctions are being pursued with increasing frequency; and the IRS and DOJ have increasingly begun going after individuals who can be held personally responsible if their job is to collect and report employment taxes and they willfully fail to follow the rules.
Federal courts have granted permanent injunctions against many delinquent employers nationwide, requiring that timely deposits be made to the IRS before operating a new business. Injunctions also prevent defendants from paying other creditors or assigning property until the IRS injunctions are paid. Just since January 1, the IRS has already filed 16 complaints seeking injunctions and has obtained 10 permanent injunctions. Additional actions are forthcoming.
In addition to civil enforcement, criminal charges could result from certain failures connected with employment tax obligations, such as when false tax returns are filed; when employees are paid in cash to avoid taxes; and when employers pay other creditors with employment taxes. If you suspect you could face any enforcement actions, but especially criminal actions, you need to consult with Kevin Thorn, a DC business tax attorney, as soon as possible for help.