Employment Taxes and Worker Classifications

Civil and Criminal Employment Tax Enforcement

An IRS and DOJ Priority for 2016

Civil and Criminal Employment Tax Enforcement – The Government’s Current Focus and What You and Your Clients Need to Know was the title of an entire program during the California Tax Bar Conference held this past November.   I anticipate we will see similar discussions related to employment tax and the enforcement of employment tax obligations during the upcoming Criminal Tax Seminar held in December.

The message is clear: Employment and payroll taxes are a priority; the Department of Justice is teaming up with the Internal Revenue Service to find employment tax law violations, publicize them and then assess significant penalties and punishments.

Some of the more common Employment Tax schemes are:

  • Pyramiding,  A fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS. Businesses involved in pyramiding frequently file for bankruptcy to discharge the liabilities accrued and then start a new business under a different name and begin a new scheme. Source IRS.gov
  • Employee Leasing,  The practice of contracting with outside businesses to handle all administrative, personnel, and payroll concerns for employees. In some instances, employee-leasing companies fail to pay over to the IRS any portion of the collected employment taxes. These taxes are often spent by the owners on business or personal expenses. Often the company dissolves, leaving millions in employment taxes unpaid. Source IRS.gov
  • Paying Employees in Cash,  Paying employees, whole or partially, in cash is a common method of evading income and employment taxes. This results in lost tax revenue to the government and the loss or reduction of future social security or Medicare benefits for the employee.  Source IRS.gov
  • Misclassification of Employees,  (See part 2)
  • Filing False Payroll Tax Returns, Preparing false payroll tax returns by understating the amount of wages on which taxes are owed, or failing to file employment tax returns are methods commonly used to evade employment taxes.  Source IRS.gov
  • Failing to File Payroll Tax Returns,