When Do Unpaid Payroll Taxes Become Criminal?

There’s talk that the IRS is more proactively tracing how unpaid payroll tax money is spent during trust fund recovery investigations. The outcome? Potentially, it’s a swifter handover to the IRS Criminal Investigation Division for criminal prosecution.

Bloomberg Tax published a commentary on the development this summer. In his observations, Attorney Eric Green of Green & Sklarz, LLC, claims that “the IRS has upped the ante” for employers who are behind on handing over collected payroll taxes. When payroll tax money isn’t submitted to the government but is instead paid to or used for the business owner’s benefit, revenue officers can pull the owner’s 1040 income tax returns to see if the money that benefited them was reported as income.

“If the money was not picked up as income on the personal tax return, the revenue officer will either submit the returns and investigation records to the civil audit division for assessment of the tax and 75% civil fraud penalty or, if significant enough…refer the case to the IRS Criminal Investigation Division to review for criminal prosecution,” he says.

The IRS has always taken payroll taxes very seriously. They account for 30% of the federal government’s yearly revenue, after all. The reason a business owner fails to submit payroll taxes has always mattered, too.

“If money is very tight, some small business owners may make the decision to use the withheld trust funds to pay suppliers. This happens because suppliers may cease deliveries or services when invoices are due, and the IRS may be slower to ask for their money,” attorneys at Brotman Law have pointed out, adding that “borrowing” the money to fund the business in other ways during hard times is also common.

Such an act comes with severe enough consequences: Mounting debt to the IRS with an eventual trust fund recovery penalty (TFRP)equal to the funds withheld from employees paychecks (“trust fund”) plus steep interest. Personal liability of trust fund recovery also comes into play (in other words, if the business can’t pay, those responsible for collecting and remitting payroll taxes will get the bill).

“Once we assert the penalty, we can take collection action against your personal assets,” the IRS asserts. “For instance, we can file a federal tax lien or take levy or seizure action.”

Criminal charges often enter the picture when the owner spends the money on themselves and, certainly, when a significant amount is in question. For example, a Midland businesswoman recently pled guilty to withholding more than $600,000 from employee paychecks and failing to pay an additional $250,000 in FICA. She, instead, spent the money on herself. She faces a maximum of five years in prison.

If you have concerns about payroll taxes and how trust fund recovery affects businesses like yours, feel free to contact us with questions.

Photo from 123rf.com

September 20, 2022

Client Spotlight

If you’re setting aside money for your kids or grandkids, the new IRC Section 530A may be a tax-smart way to do it….
When two high earners say “I do,” protecting pre-marital wealth isn’t unromantic—it’s essential strategic planning….
Cryptocurrency may have gone mainstream, but tax compliance is rapidly catching up with updated IRS property classifications and Form 1099-DA broker reporting to evolving regulations….
You might be sitting on a valuable tax strategy without realizing it. Before you make any moves, keep these critical rules in mind….
Under certain circumstances, an S corp election can be great for tax savings, but it’s not always great for growth. Here’s what you should know…
As a business owner, what can you do to eliminate tax surprises? Before jumping on tax liability insurance to insure your tax bill, consider what…
From accountant to owner, and now to a successful exit! Amir Kamel proved that “everything good takes time”—including walking away on your own terms. Read…
After waiting 11 years for his visa, Amir Kamel’s journey from Cairo to building a multi-million dollar Texas business is a true masterclass in grit,…
Used wisely, 100% bonus depreciation can fuel growth and protect cash flow; used poorly, it can create unnecessary debt and future tax friction….
Discover how this San Antonio entrepreneur transitioned from managing communities to constructing them—doubling his commercial construction firm’s size year over year….
In the eyes of the IRS, student-athletes landing NIL deals are now self-run businesses. Learn the tax implications and four golden rules critical to their…
Disputes in closely held businesses rarely stem from simple math errors. Instead, they arise from “creative” accounting that obscures the business’s true economic reality….

Blogs and Articles

Is the Trump Account a Safe Bet for Gift Tax Savings?

If you're setting aside money for your kids or grandkids, the new IRC Section 530A may be a tax-smart way to do it....

Is the Trump Account a Safe Bet for Gift Tax Savings?

Read More

Protecting Dual-Income Pre-Marital Wealth

When two high earners say "I do," protecting pre-marital wealth isn't unromantic—it's essential strategic planning....

Protecting Dual-Income Pre-Marital Wealth

Read More

Crypto Tax Changes Are Coming, But What Does That Mean?

Cryptocurrency may have gone mainstream, but tax compliance is rapidly catching up with updated IRS property classifications and Form 1099-DA broker reporting to evolving regulations....

Crypto Tax Changes Are Coming, But What Does That Mean?

Read More

What Is Tax Loss Harvesting?

You might be sitting on a valuable tax strategy without realizing it. Before you make any moves, keep these critical rules in mind....

What Is Tax Loss Harvesting?

Read More

Is an S-Corp Election Still Right for Small Business Owners?

Under certain circumstances, an S corp election can be great for tax savings, but it’s not always great for growth. Here’s what you should know...

Is an S-Corp Election Still Right for Small Business Owners?

Read More

Do Businesses Need Tax Liability Insurance?

As a business owner, what can you do to eliminate tax surprises? Before jumping on tax liability insurance to insure your tax bill, consider what...

Do Businesses Need Tax Liability Insurance?

Read More

Princess Professional

From accountant to owner, and now to a successful exit! Amir Kamel proved that "everything good takes time"—including walking away on your own terms. Read...

Princess Professional

Read More

Princess Beauty Supply

After waiting 11 years for his visa, Amir Kamel's journey from Cairo to building a multi-million dollar Texas business is a true masterclass in grit,...

Princess Beauty Supply

Read More

100% Bonus Depreciation: Hits and Misses

Used wisely, 100% bonus depreciation can fuel growth and protect cash flow; used poorly, it can create unnecessary debt and future tax friction....

100% Bonus Depreciation: Hits and Misses

Read More

DJS Resources

Discover how this San Antonio entrepreneur transitioned from managing communities to constructing them—doubling his commercial construction firm's size year over year....

DJS Resources

Read More

College Athlete NIL Tax Implications: When Fantasy Becomes Reality

In the eyes of the IRS, student-athletes landing NIL deals are now self-run businesses. Learn the tax implications and four golden rules critical to their...

College Athlete NIL Tax Implications: When Fantasy Becomes Reality

Read More

Profit-Sharing Disputes: IDing What Went Wrong

Disputes in closely held businesses rarely stem from simple math errors. Instead, they arise from "creative" accounting that obscures the business's true economic reality....

Profit-Sharing Disputes: IDing What Went Wrong

Read More

What’s the Deal with Trump’s Forever Tax-Immunity Loophole?

While you might not be signing an addendum with the Acting Attorney General, you CAN use closing agreements and statutes of limitation to create your...

What’s the Deal with Trump’s Forever Tax-Immunity Loophole?

Read More

Secret Texas Wealth Tax Traps

When building wealth in Texas, poor planning can result in hefty taxation as you earn your way to the top....

Secret Texas Wealth Tax Traps

Read More

How Long to Keep Tax Records? Forever Might Be Best 

A new precedent is forming in the tax courts that can cost even innocent taxpayers hundreds of thousands of dollars....

How Long to Keep Tax Records? Forever Might Be Best 

Read More

Now Accepting New Clients

Let’s Start the Conversation

Let’s take a look at your finances together. We offer a complimentary 1-hour call to review your past tax returns. If we see a way to help you, we will.

Want to receive tax strategies and tips direct to your inbox?

Name(Required)