Wednesday, August 21, 2013

Trust Fund Criminal Penalties

When it comes to employee tax withholdings, business owners can be sentenced to jail if they aren’t careful. In July, Richard Whatley of Salt Lake City was sentenced to a maximum 51 months on federal prison for willful failure to account for payroll taxes. On top of that, he must pay $540,000.00 in restitution. This is a reduction from the original $2.3 million in employee tax withholdings that he failed to forward to the IRS.

Mr. Whatley is the former owner of three employee leasing companies. He signed the payroll checks for all of the leased employees, and over the course of five years (2001-2006), he failed to properly forward taxes that were held on the employees’ behalf to the IRS. He reached a plea agreement with prosecutors in January, pleading guilty in exchange for a sentence of 41 to 51 months in prison and reduced restitution. Judge David Nuffer sentenced him to the maximum 51 months from that agreement.

The IRS requires that business owners, officers, and directors be held responsible for unpaid taxes that were withheld (or supposed to be withheld) for the IRS, but not forwarded to them. These are trust fund taxes. The officers and directors are held responsible if they have the ability to control which debts are paid. These trust fund taxes include payroll taxes, sales tax, and certain employment taxes. On the civil side, the IRS can transfer any trust fund tax liability to any person that they feel is responsible for the unpaid debt.

Owners and officers aren’t just vulnerable to civil (monetary) liability. Like Mr. Whatley, they can be put in jail. To pursue criminal imprisonment, the IRS needs to show a willful failure to pay. In some cases, it has determined that “willful” only requires custody or responsibility of the funds. Charges of tax evasion or willful failure to account for the trust funds are felonies.

The lesson here is clear. Businesses can struggle and fail. They can even find shelter and a fresh start through bankruptcy, except for trust fund taxes. A business, its owners, and any employee with significant responsibilities cannot avoid liability for trust fund taxes. It may become a personal liability, and even a criminal one. Tax evasion and other criminal charges are a real danger any time trust fund taxes are not paid.

Monday, May 6, 2013


A recent Notice of Deficiency from the IRS has received national attention, both for its timing and its recipient. The Notice was directed to Sumner Redstone, the 89-year-old majority shareholder of CBS and Viacom, for failure to file a gift tax return pertaining to a gift made in 1972. The amount of the taxes and penalties total $1.1 million. This does not include interest, which many have calculated going back to only 1996, is at least $1.4 million.

Generally, a statute of limitations applies to deficiencies this old, but because no return was ever filed, the time period did not begin running. On that basis, the Notice was issued, and Redstone is challenging the assessment in Tax Court. He argues that the 1972 payment was in fact not a gift, but was for the settlement of a legal dispute within the family’s movie theater business.

The case is titled Redstone v. Commissioner, T.C., No. 008097-13.

Monday, April 29, 2013

Tax Evasion and the IRS

True or false: The IRS wants to throw you in jail for tax evasion.


It is very rare for the IRS to show up at your home, cuff you and haul you off to jail. Most criminal investigations conducted by the IRS are linked to fraud, drug or money laundering activities. The IRS is the one federal agency that investigates criminal violations of the Internal Revenue Code.

Here are a few tips to stop the IRS from pursuing you:

File and pay your taxes in a timely manner.

Do NOT ignore letters and correspondence from the IRS. Ignorance is not bliss!

If you do get audited, do not go in angry or defensive.

Never destroy records. This could be considered a crime.

Hire an attorney!

Just remember, even if you cannot pay your taxes, it is best to file a return and work it out. There are many options for paying your taxes over time. Besides, you might sleep a little easier without those prison nightmares.

Tuesday, April 16, 2013

The IRS and Social Media

The IRS indicated as early as December of last year that it would begin in January to examine connections between social networking accounts for actionable tax violations. As this strategy gains wider recognition, new and challenging issues have begun to arise. It has said that it will only monitor accounts if a tax form raises a red flag, but it is unclear to what extent that monitoring will be. It remains untested how thoroughly it can examine social media accounts.

The technique follows the pattern set my social media marketing, through data mining and conducting widespread searches for certain keywords, often potentially taking advantage of “loopholes” in Facebook privacy settings. Because that is more the exception in the rule, the IRS is generally limited to publicly divulged information.

The precedent has been set for using social media to secure indictments in recent East Harlem gang activity, and until now, most concerns regarding the government’s surveillance of social media have been limited to the Department of Homeland Security and the FBI. However, the IRS has quietly followed their wake into the social media investigations.

For example, the IRS can use the geographical tagging that is connected to Facebook and Twitter posts and photos as evidence of an individual’s travels and examine their content to ascertain the primary purpose of those travels, thus determining the deductibility of those related expenses.

Also, it has indicated that that there is a higher likelihood that an individual with an overseas bank account is connected on social media to another individual with a foreign bank account. If an individual with an unreported account is discovered through the recently expanded disclosures by formerly private banks, then the IRS will likely examine those social media connections for others likely to have undisclosed foreign accounts.

Private government contractors have been working diligently towards the development of software to identify individuals that meet certain criteria (such as security threats, in the case of the Department of Homeland Security), which technology is closer to being appropriated by the IRS to perform similar tasks in pursuit of the more efficient collection of revenue.

These government agencies have said that they are in the process of developing guidelines for how to gather information from social media while still protecting privacy, but make no mistake that such monitoring is now fair game.

Friday, February 1, 2013

Tax Planning and IRS Issues

Tax planning is a very important part of running a successful business. We have many clients who come to us owing the Internal Revenue Service thousands of dollars. The simplest way to avoid any problems with the IRS is to file your taxes in a timely fashion and pay all the taxes owed. However, in this economy, it is not always that easy. If you do receive a notice from the IRS, there are a number of things that can be done if you do in fact owe the taxes. You can (a) file bankruptcy if you qualify; (b) file an Offer in Compromise; (c) set up a payment plan; or (d) settle.

Who do I choose?

Who do I choose? Things happen that are beyond our capacity. For instance, you receive a letter from the IRS stating they are going to...