Failure To Pay Employment Taxes Can Result In Jail Time

When people think of tax evasion and prison sentences, the first thought is Wesley Snipes, Todd Chrisley, or the recently dropped charges against Hunter Biden. Prison for tax fraud and evasion seems like it only happens to the rich and powerful; however, anyone can end up in prison for these crimes.

The DOJ Is Actively Pursuing And Winning Failure To Pay Employment Tax Cases

In the past three months, four men felt the consequences of the justice system due to failure for paying their employment taxes. On August 18, 2023, an Oklahoma man and a Virginia man pleaded guilty, in separate cases, to willfully failing to pay employment taxes.

On June 22, 2023, John H. Worthington of Owings Mills, Maryland plead guilty to not reporting or paying not approximately $2,813,348.94 in employment taxes due to the IRS. Instead of meeting his tax obligations, Worthington used funds from his for a variety of personal expenses, including golf club membership dues, season tickets to the Baltimore Orioles, and vacations.

On July 7, 2023, Frank Stevens was even sentenced to 15 months in prison for evading to pay $700,000 in employment taxes. Mr. Stevens prevented the IRS from collecting through bank levies the taxes he owed by leaving his bank accounts with only $0.01.

These are extreme circumstances; however, failure to pay employment taxes is a common case. When a business fails to pay the employment taxes, the IRS can directly seek reimbursement from an individual, rather than the business itself. Even employees, not only the director or owner of the business, may be held liable. The IRS will file a Trust Fund Recovery Penalty, or TFRP, which seeks the back taxes and fines an individual for knowingly or willfully keeping employee FICA and income taxes owed to the IRS.

The Elements Of A TFRP Case

IRC Section 6672 states that:

“Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

The Trust Fund Recovery Penalty is substantial, with the penalty being “equal to the total amount of tax”. Since the corporate veil does not apply to employment taxes, this is one area where individuals should be incredibly careful.

The TFRP may be assessed against any person who:

  • Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
  • Willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:

  • An officer or an employee of a corporation;
  • A member or employee of a partnership;
  • A corporate director or shareholder;
  • A member of a board of trustees of a nonprofit organization;
  • Another person with authority and control over funds to direct their disbursement;
  • Another corporation or third-party payer;
  • Payroll Service Providers (PSP) or responsible parties within a PSP;
  • Professional Employer Organizations (PEO) or responsible parties within a PEO;
  • Responsible parties within the common law employer (client of PSP/PEO); or
  • Trustee or agent with authority over the funds of the business.

To be held responsible, the court in Fiataruolo v. US held that a person need to have financial control, but it is not meant to ensnare those who have merely technical authority or titular designation.

For willfulness to exist, the responsible person:

  • Must have been, or should have been, aware of the outstanding taxes and
  • Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).

In Domanus v. United States, the Court held that willful is “voluntary, conscious, and intentional” act, it does not have to be one with malice. The IRS must merely show that the responsible party was either aware of the outstanding the taxes and disregarded the law or was indifferent to its requirements. A failure to investigate or correct mismanagement satisfies the willfulness requirement. I find that this is where many people get in trouble – and should be careful. If someone is an owner in the business they need to ensure that the people in control of the finances are using them with due diligence and are paying the employment taxes.

A TFRP is serious, and results in prison time for some taxpayers. If you are ever in a situation in which your business has other debt, be sure to pay the employment taxes before any other debts to avoid this awful situation.

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