Justice Department Reminds Employers of Their Employment Tax Responsibilities
Civil and Criminal Enforcement Actions Are Taken Against Employers and Individuals Who Violate Employment Tax Laws
With the first quarterly employment tax returns of 2016 due April 30, the Justice Department reminds employers that they have a legal responsibility to collect and pay over to the Internal Revenue Service (IRS) taxes withheld from their employees’ wages. For employers and other responsible persons who fail to withhold, report, and pay employment taxes to the IRS, the Department is committed to enforcing federal employment tax laws through both civil litigation and criminal prosecutions.
Employers Must Comply with Employment Tax Laws
Employers in the United States are required to collect, account for, and pay over to the IRS tax withheld from employee wages, including federal income tax and taxes under the Federal Insurance Contributions Act (FICA), including old-age, survivors, and disability insurance taxes, also known as social security taxes, and the hospital insurance tax, also known as Medicare taxes. Employers also have an independent responsibility to pay their matching portion of social security and Medicare taxes.
Tax withheld from employee wages accounts for approximately 70 percent of annual revenue collected by the IRS. When last measured, underreported and unpaid employment taxes represented approximately $72 billion of the overall tax gap in the United States. As of September 2015, more than $59 billion of tax reported on employment tax returns remained unpaid.
“Employers who comply with our nation’s tax laws are entitled to a level playing field,” said Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division. “Those individuals and entities that fail to withhold employment tax, or withhold and fail to pay employment taxes over to the IRS, not only steal from their employees and the U.S. Treasury, but gain an unfair competitive advantage over businesses down the street and across the country. The Department and its colleagues in the IRS have increased their efforts in this area, and are holding delinquent employers accountable.”
“Fairness in the employment tax arena is an important part of the nation’s tax system,” said IRS Commissioner John Koskinen. “The IRS is committed to working with the Justice Department to protect this important area, and there’s a long list of efforts we’ve taken in both civil and criminal investigation areas when employers try to evade their legal responsibilities and, in the process, gain an advantage over their competitors who are honoring their legal responsibilities. In addition, the IRS is taking new steps to identify and contact employers falling behind on their payments before they file their tax returns, offering to assist them earlier in the process to head off steeper interest and penalty charges. This effort not only provides an important service, it could help prevent the need for future enforcement activity.”
Willful Failure to Comply with Federal Employment Tax Laws is a Crime
An individual’s failure to comply with employment-tax obligations is not simply a civil matter. Employers who view amounts withheld from employee wages as a personal slush fund, treat withheld employment taxes as a loan from the government that can be repaid if and when they see fit, or whose business model is based on a continued failure to pay employment tax, are engaging in criminal conduct and face prosecution, imprisonment, monetary fines and restitution. According to statistics provided by IRS Criminal Investigation, in the 2015 fiscal year, individuals convicted of employment tax crimes were sentenced to an average of 24 months in prison. Recent prosecutions include:
- Employers using employment taxes for personal expenses
In March 2016, Larry C. Thornton, the owner, president, and chief executive of a Tennessee-based check-processing company and a credit-card processing company, pleaded guilty to failing to pay more than $6.8 million in employment taxes. Thornton admitted that he was responsible for collecting, accounting for and paying over to the IRS the employment taxes withheld from the wages of his companies’ employees, but from the second quarter of 2007 until at least the second quarter of 2011, Thornton caused the companies to stop paying over the taxes required to be withheld from the companies’ employees’ paychecks and caused the companies to stop timely filing Employer’s Quarterly Federal Tax Returns (Forms 941) with the IRS. During the years that Thornton failed to comply with his employment tax obligations, he spent over $6.2 million on personal expenses, including house and condominium payments; vehicle, yacht, and motorcycle loan payments; personal travel; and start-up funding for his wife’s beauty boutique. As part of his guilty plea, Thornton admitted that his fraudulent conduct caused a tax loss of more than $8.9 million, and agreed to pay restitution of more than $10 million.
In June 2015, Wilbur Anthony Huff, a Kentucky man who controlled a professional employer organization (PEO) located in Tampa, Florida, was sentenced to 12 years in prison for both committing various tax crimes that caused more than $50 million in losses to the IRS and engaging in a massive fraud scheme. The PEO was paid to manage the payroll and tax and workers’ compensation insurance obligations of its client companies. However, instead of paying the $53 million in taxes that the PEO’s clients paid to the PEO and owed the IRS, Huff stole the money, diverting millions of dollars to fund his investments in unrelated business ventures and paid his family members’ personal expenses, including mortgages on Huff’s homes, rent payments for his children’s apartments, staff and equipment for Huff’s farm, and designer clothing, jewelry, and luxury cars. The court also ordered Huff to pay more than $108 million in restitution.
- Employers using employment taxes to pay other creditors
In July 2015, Maria Elizabeth Townsend, the president and majority shareholder of a Washington-based electrical contractor was sentenced to 40 months in prison and ordered to pay $3.3 million in restitution to the IRS for failing to pay over employment taxes to the IRS. For 16 quarters between 2005 and 2009, Townsend withheld over $3 million in employment taxes but failed to pay those taxes to the IRS. Instead, between April 2007 and September 2009, Townsend authorized the disbursement of over $31 million in company funds to pay the company’s vendors and employees, a large dividend to one of her partners, $300,000 toward payment of her joint personal income tax obligations, more than $260,000 to family members, and personal expenses including constructing a pool at her residence, and buying a boat and personal vehicles.
- Employers paying employees in cash to avoid employment tax
In April 2016, Kyle Archie, the owner of several Reno, Nevada landscaping and rock hauling businesses pleaded guilty to one count of failure to pay over employment taxes. Archie admitted that, although he collected these taxes from his employees’ wages and held them in trust, he failed to pay over the employment taxes to the IRS. In documents filed with the court, the government alleged that Archie paid employees’ overtime wages in cash to avoid employment tax obligations. While failing to pay employment tax due, Archie used available funds to build a house, purchase motor vehicles and personal watercraft, and travel. Linda Archie, Kyle’s mother and the bookkeeper for the businesses, pleaded guilty to one count of willful failure to file a tax return, admitting that between 2003 and 2009, she failed to file Employer’s Quarterly Federal Tax Returns (Forms 941) on behalf of these businesses to account for the taxes that were withheld from the employees’ wages. The Archies stipulated that the tax loss caused by their crimes exceeded $545,000. They are scheduled to be sentenced on August 15.
In July 2015, Eric Anderson, the owner of three New York construction companies, was sentenced to serve 18 months in prison and was ordered to pay more than $1 million in restitution. Anderson used a commercial check cashing service to cash more than $10.5 million in checks paid to his construction companies and used a portion of the cash to pay his employees “under the table,” while failing to collect and pay over employment taxes to the IRS.
- Employers filing false employment tax returns
In October 2015, James Pielsticker, former chief executive officer and president of Arrow Trucking Company, was sentenced to serve 7 ½ years in prison and ordered to pay $21 million in restitution for conspiring to defraud the United States and to commit bank fraud, and for attempting to evade his individual income taxes. Pielsticker, his chief financial officer, James Moore, and others withheld employment tax from Arrow’s employees’ wages but did not report or pay over the tax to the IRS, despite knowing they were required to do so. The conspirators paid Pielsticker’s personal expenses and submitted fraudulent invoices to induce a bank to pay unwarranted funds. After cooperating with the government and testifying against Pielsticker, Moore was sentenced to 35 months in prison.
In July 2015, Happy Asker, the president, founder, and public face of the Happy’s Pizza franchise, a chain based in Farmington Hills, Michigan, was sentenced to 50 months in prison and ordered to pay $2.5 million in restitution to the IRS. Evidence at trial established that from 2004 through 2011, Asker, along with others, executed a systematic and pervasive scheme to defraud the IRS. Gross sales and payroll amounts were substantially underreported on numerous corporate income tax returns and payroll tax returns filed for nearly all 60 Happy’s Pizza franchise locations. From 2008 to 2010, Asker and his co-conspirators diverted for personal use more than $6.1 million in cash gross receipts from approximately 35 different Happy’s Pizza stores in the Detroit area, Illinois and Ohio. In total, Asker and certain employees and franchise owners failed to report to the IRS approximately $3.84 million of gross income and approximately $2.39 million in payroll taxes from the various Happy’s Pizza franchises.
Delinquent Employers also face Civil Litigation and Injunctions
Employers that ignore their employment tax obligations will face civil enforcement efforts, including federal lawsuits to enjoin noncompliance, ensure future compliance, and collect amounts due.
In the last year, federal courts have entered permanent injunctions against delinquent employers across the country, requiring the timely deposit of payroll taxes and filing of employment tax returns, notice to the IRS that the requisite deposits have been made and notice to the IRS if the employer, or someone working at the employer’s behest, begins operating a new business. The injunctions also preclude defendants from assigning property or making payments to other creditors until the employment tax obligations accruing after the date of the injunction are paid. Injunctions have been entered against a Los Angeles County pizza parlor and its owner, a Washington-based dentist, the owner of a Delaware donut shop, a South Carolina trucking company, and a Baltimore-area marble and granite importer, just to name a few. Since Jan. 1, the Department has filed 16 complaints and obtained 10 permanent injunctions against delinquent employers, and additional actions are forthcoming.
When individuals and entities subject to these injunctions knowingly violate the terms of the injunction, the Tax Division stands ready to seek orders of civil or criminal contempt, including incarceration, to bring the defendants into compliance.
Liability Extends to Responsible Individuals
Any individual who is responsible for ensuring that employment taxes are collected, accounted for, and paid over to the IRS, and willfully fails to do so may be subject to a civil penalty equal to the amount of the unpaid withholdings. This civil penalty, referred to as the trust fund recovery penalty, may be imposed even if the individual uses the employment tax to pay other creditors or keep the business afloat. Individuals subject to these penalties include, but are not limited to, bookkeepers, managers, treasurers, and corporate officers. The Department assists the IRS to defend challenges to trust fund recovery penalty assessments, and to ensure that such assessments are collected.
In August 2015, a federal court in Michigan held that Eric Kus and Roger Byrne, the chairman and the president of an automobile interior trim manufacturer, were liable for unpaid employment taxes even though they did not know that the taxes were unpaid. The court found that they “recklessly disregarded known risks” that the employment taxes would not be paid because they relied on the company’s controller, who they knew had previously failed to pay employment taxes when they were due.
In July 2015, the Court of Federal Claims ruled that Douglas Waterhouse, a vice president and partial owner of a California glass design and installation company, was individually liable for unpaid employment tax based on his authority, and therefore responsibility, over the company’s finances, even though he was not involved in day-to-day operations. The court found that Waterhouse acted willfully because, despite knowledge of the outstanding employment tax liabilities, he chose to continue operating the business and sought payments for vendors and employees instead of the IRS.
“The American taxpayer should not be forced to subsidize businesses that refuse to comply with the tax laws,” said Acting Assistant Attorney General Ciraolo. “The Justice Department and the IRS will continue to identify, investigate, and hold accountable those individuals and businesses that willfully evade their employment tax obligations.”
For more information about civil and criminal employment tax enforcement efforts, visit the Tax Division’s website.