If the IRS asks to interview you about unpaid payroll taxes, you should seek representation immediately. Not only do you face the risk of civil penalties, but you now also face the risk of criminal prosecution.
According to a 2017 report by the Treasury Inspector General for Tax Administration (TIGTA), 1.4 million employers owed approximately $45.6 billion in unpaid employment taxes. This often occurs when a business is experiencing economic strain, and they decide to pay other creditors rather than paying the IRS.
Until now, these cases have been handled almost exclusively on the civil side, but there has been a recent push by the IRS Criminal Investigation Division (CI) to prosecute responsible persons in egregious cases.
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Trust Fund Recovery Penalty (Civil)
Under 26 U.S.C. §6672, the IRS can assess the “Trust Fund Recovery Penalty” (TFRP) against “responsible persons” at the business. This is a civil penalty for 100% of the employee’s portion of the payroll taxes, and it is assessed personally against one or more individuals at the business.
Willful Failure to Collect, Truthfully Account For, and Pay Over Employment Taxes
Under 26 U.S.C. §7202, the corresponding criminal statute, the same “responsible persons” described above, could also be subject to criminal prosecution. A §7202 violation is a felony punishable by up to 5 years in prison per count.
The elements for civil violations (§6672) and criminal violations (§7202) are identical, which theoretically means that anyone who is civilly liable could also be criminally liable. The only difference between the two cases is the burden of proof that is required.
Form 4180 Interviews
In determining who to assess the civil Trust Fund Recovery Penalty against, Revenue Officers seek to conduct “Form 4180 Interviews” with potentially responsible individuals. The answers given in this interview could be incriminating, and they could potentially be used in a criminal case. Therefore, you should not submit to an interview without first speaking to an experienced professional and seeking representation.
What Factors Can Cause a Civil Case to Turn into a Criminal Case?
While the assessment of civil penalties happens in most cases, however, criminal prosecution is not nearly as common. Here are some examples of factors that could turn a civil Trust Fund case into a criminal one:
- There is a previous history of employment tax liabilities
- The owners of the business are living a lavish lifestyle while there had been no payment of the trust fund taxes
- The amount owed is large ($100,000 or more)
- Employment tax liabilities are continuing to accrue currently (i.e., “pyramiding”)
- The business owners make false or misleading statements to the IRS concerning the liabilities
Make Sure to Protect Yourself
If your business owes payroll taxes, it is important to obtain representation as early in the process as possible. The IRS is very aggressive about collecting payroll taxes, and they may bully you into making incriminating admissions along the way.
If you are facing this situation, Contact the accountants in our IRS Representation and Defense Group, or call Naveid Jahansouz at 972-818-5300.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.