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.
