As an employer that has employees you are responsible for withholding federal taxes and contributing your portion as well as submitting these monies to the IRS. These taxes include Social Security and Medicare taxes as well as Federal unemployment taxes. Employers are required to pay as you go, which means they cannot fall behind on these taxes.
The IRS is getting tough on unpaid employment tax by pursuing these monies more aggressively. These methods will include civil as well as criminal enforcement. Although the IRS has always had the authority to collect on unpaid employment tax, they are now going to ramp up criminal enforcement like never before.
The 2008 fiscal year is a good example of the tougher enforcement methods. There were 42 convictions for failing to pay and/or collect employment taxes. The average sentence was 29 months of incarceration. Of those convicted, 81% were actually incarcerated. The IRS is not fooling around!
The IRS has outlined specific behavior that will be investigated and prosecuted. Some of these include:
- Paying employees in cash, thereby avoiding collection of federal taxes
- Filing false payroll tax returns and/or failing to file employment tax returns
- Frivolous protester arguments
- Misclassifying employees as independent contractors.
- Businesses that fail to pay the employment taxes and then files bankruptcy and starts a whole new business (this is actually called Pyramiding)
In addition to enforcing criminal charges the fines and penalties that will be assessed can be as much as $250,000 for each individual found willfully failing to collect and pay employment taxes. The criminal enforcement brings jail time up to 5 years. Financial difficulties may not be considered a reasonable cause for neglecting to pay employment taxes and may also be prosecuted.
Never ignore a letter from the IRS. Every communication from the IRS lists deadlines in which you must meet certain criteria. It may be a date by which the debts must be paid, or a date in which you must contact the IRS. Take these dates very seriously, because the IRS sure does! The IRS does make every effort to contact you and to give you enough time to find a resolution to your issue. If you are unable to find a resolution you do have the option of contacting the IRS and trying to work out a mutually agreeable payment plan. The point here being, if you do not communicate after being contacted, the IRS will take your silence to mean you are willfully avoiding your tax liability and it could be deemed as tax evasion.
You should contact a tax professional to assist you with gathering the proper documentation and to explore options that may be available to you based upon your specific circumstances. The tax professional may also represent you to the IRS and handle all communications on your behalf. This can take much of the stress levels out of the process! You don’t want to go this alone, the tax laws are complicated and require a professional to avoid possible criminal charges.