For business owners and others in the corporate world, few charges are scarier than tax fraud. These allegations come when the government thinks it has been cheated, and when that happens, they get serious. Our legal team’s job is to assist people who have been accused of many kinds of fraud, including employment tax fraud.

What is “Employment Tax Fraud?”

When someone runs a business, they have a legal requirement to pay taxes just like everyone else. The government has decided that for most businesses, it is the job of the employer to withhold their employee’s income taxes. Businesses also have to withhold Medicare, social security, and other money. In addition, businesses usually have to match employee social security contributions. They may also have other expenses.

Employment tax fraud occurs when an employer fails to withhold that money or fails to send it to the federal government. Although a business gets the money from its employees, it really belongs to the IRS. The business is just holding it for a while.

Examples of Employment Tax Fraud

There are a few common ways for employment tax fraud—also known as payroll tax fraud—to occur. Here are three:

  • Linda runs a construction company. It is hard to find good help, and most of her employees only stick around for a few months. Instead of filing all the paperwork every time she has a new hire, Linda pays most of her workers in cash and does not report them all on her taxes.
  • Jim’s pizza company is not doing so well, and he doesn’t want his creditors to know. He always pays his employees with personal checks, minus the required taxes and public service deductions. Instead of sending that money to the government, Jim uses it to cover operating costs and petty expenses, so it looks like the pizzeria is in the black.
  • Khalid runs a carpet-cleaning company. He hires all his workers through a temp agency. Another company handles the books. He does not always tell the payroll company how many people are working for him and pays some employees in cash instead. He figures that the liability is on those other companies if the IRS starts sniffing around.

Who Can Be Charged With Employment Tax Fraud?

Any business owner, employer, or decision maker who has a duty to send payroll taxes and deductions to the IRS must do so. Any of those individuals that fail to send that money to the government could face employment tax fraud charges.

Legal Definition – Employment Tax Fraud

The duty to withhold payroll taxes is outlined in U.S. Code, which basically says that all employers have to withhold the correct amount of income tax from employee pay. The law also says that employers withhold social security and Medicare contributions and must withhold other money at the employee’s request.

If an employer fails to do so, they will find themselves in violation of the U.S. Code, and subject to penalties outlined in the law.

These charges may appear as conspiracy charges, such as conspiracy to defraud the federal government, if more than one person is involved in the alleged fraud.

How Does the Government Convict Someone of Employment Tax Fraud?

If you fail to meet your payroll tax obligation as an employer, the government will prosecute under two different statues—both of which are more general tax fraud statutes.

  • Statute #1.  The first statute says that the government gets to collect whatever money is still owed.  So, in addition to any other fines or fees, there is no way around paying off the tax burden. The government is required to serve someone accused of employment tax fraud with a notice at least 60 days before they try to collect the money owed. Once this notice is received, the person accused of fraud has 30 days to contest the demand in court.

Persons found guilty of payroll tax fraud will pay the entire amount owed to the IRS. They might also face thousands of dollars in fines and prison time.

  • Statute #2.  The second statute is a criminal statute. It defines employment tax fraud as a felony punishable by both fines and prison time.  If someone faces conspiracy to defraud the United States charges, it must be shown that they planned to defraud the government with at least one other person and that they or someone else in the “conspiracy” undertook part of that plan.

For example, if Jim’s wife handles the payroll for his pizzeria and she helped him keep the money owed to the IRS, they could both be charged with conspiracy. Those charges stack on top of the payroll tax evasion charges.

What Penalties Do People Face If Convicted of Employment Tax Fraud?

The money in question is supposed to go to the government. For this reason, those convicted of employment tax fraud often receive the maximum penalties. That is because these cases are used as examples to scare others into complying with the law. Besides, if you are expecting mercy from a federal judge during sentencing, just remember that taxes pay their salary.

In addition to paying the entire amount owed to the IRS, prison time is possible. The criminal tax fraud statute calls for up to five years in federal prison and up to $10,000 in additional fines. Those convicted may also face supervised release and of course will have a felony on their criminal records.

If conspiracy charges are brought and proved, they can also face up to an additional 5 years in prison and more fines and fees.

What Federal Agencies Investigate Employment and Payroll Tax Fraud?

Unlike many other crimes, there is only one agency truly dedicated to investigating employment tax fraud and building a case against those accused. The Internal Revenue Service Criminal Investigations wing (IRS-CI) handles all tax fraud investigations as well as other kinds of financial crime. No other agencies play a major role in these investigations.

This might sound like a good thing for those accused of payroll tax fraud. In fact, it is not. Unlike other wide-ranging federal agencies, such as the FBI or ATF, IRS-CI has one job and one job only: finding tax fraud.

In addition to thousands of investigators worldwide, IRS-CI also brings to bear the full weight of federal authority and has many resources at its fingertips. Because tax fraud is just about all they do, they have seen every “trick in the book” so to speak.

Statistics

According to government data, in 2017, IRS-CI boasted a conviction rate of 91.5% on thousands of warrants served. These convictions related to billions of dollars in tax fraud. Those numbers put the agency at the top of federal law enforcement in terms of success rate. Anyone under investigation by IRS-CI needs to understand that they are being investigated by the best of the best.

Is there any chance to not end up in the 91.5%?

Not unless you have a very good tax fraud attorney on your side. Once a case starts to build, you have less and less options. That is why it is important to retain counsel as soon as possible. The best time to hire an attorney is during the investigation but before charges are filed.

The law firm you hire will need to be familiar with tax law, federal fraud statutes, and common investigatory procedures—including financial and computer forensics. Together, you and your legal team will build a strategy highlighting your strengths and compensating for areas where you may be vulnerable.

An experienced attorney and our team will help you set your expectations realistically. We will explain the possible consequences. We will work with you to decide what is acceptable and what is not. And if necessary, we will find ways to secure the minimum penalty if complete innocence is not possible.

Law enforcement can lie to manipulate you into helping. Before talking with or assisting authorities, speak to your legal team to make sure you get treated fairly.

Don’t Let Others Pass the Blame Onto You.

In many cases, especially when large businesses or corporate structures are involved, the guilty parties will try to blame someone else. You might find yourself in such a situation—stuck with charges you do not deserve because of how someone else broke the law.

If that is the case, your attorney might be able to clear up the confusion, provided you cooperate with law enforcement. Without an attorney, it is likely law enforcement will force you to cooperate and then charge you in the end.

This may include a plea deal that actually benefits you—a deal you would not otherwise be offered without the right legal representation.

Defending Against Employment Tax Fraud

When you are accused of violating payroll tax laws, you can expect the federal government to throw the book. Several books, actually—tax code and U.S. criminal code. Simply put, they think you took their money. If everybody did that, they would not have jobs. They are going to try to make an example out of you.

The IRS will not pursue cases they cannot win. If they are after you, you need to be worried.

But “innocent until proven guilty” still applies, even if it is the government you are accused of defrauding. They have to prove you broke the law beyond a reasonable doubt. That will not be easy when you have a bad tax fraud defense team on your side.

These cases often play out like a game of chess; a good law firm can predict the moves the government will make and plan ahead.  Without that legal team, the government is basically playing against itself—and you will pay the consequences.

“Employment Tax Fraud” in the News

Article #1

Massachusetts Temp Agency Operator Pleads Guilty to Employment Tax Fraud

Charge: Failure to Collect and Pay Employment Taxes

Allegations: Underreporting Employee Numbers and Earnings

In 2018, Huong “Lynn” Le, a Massachusetts woman, pleaded guilty to underreporting the number of employees working for her temp agency and their wages.

According to the DOJ press release, between 2006 and 2011, Le tried to conceal the size of an employment agency she operated with Tien Chau, also of Massachusetts.

Le paid many of her employees in cash “under the table” and then did not report those wages to the payroll company handling the temp agency’s books. As a result, the payroll company unknowingly filed false reports with the IRS for those years.

These actions were part of a broader pattern of fraud and deception. She and Chau changed the agency’s name at least four times from 2006-2011. They used family members and others on official paperwork to conceal business ownership. They also cashed millions of dollars’ worth of checks themselves that should have gone to the temp agency.

Le’s plea came after Chau already pleaded guilty to the same charge—failing to pay employment tax. Chau also pled guilty to conspiracy to defraud the federal government and obstructing revenue and tax laws.

The court proceedings were the result of efforts by IRS Criminal Investigation. If convicted, Le faces up to five years in prison followed by supervised release. She could also face up to $256,527 in restitution as well as other fines.

To learn more about this case, click this link, or copy the URL below:

https://www.justice.gov/opa/pr/massachusetts-temp-agency-operator-pleads-guilty-employment-tax-fraud

Article #2

Pittsburgh Tax Attorney and Owner of Iceoplex Convicted of Employment Tax Fraud

Charge: Failure to Collect and Pay Employment Taxes

Allegations: Failing to Pay $790,000+ in Employment Taxes

In 2016, a Pittsburgh tax attorney, Steven Lynch, was convicted on 16 counts of failure to collect and pay employment taxes.

According to the DOJ press release, Lynch co-owned and handled the finances for a Pennsylvania sports facility. His duties included withholding taxes from his employees’ paychecks. But between 2012 and 2015, Lynch kept almost $800,000 of that money. He was supposed to turn it over to the IRS.

Lynch’s conviction put him in hot water. During sentencing, he faces up to 5 years in prison for each of the 16 counts of tax fraud. Although the time would be served concurrently, it could still mean a lengthy prison stretch. And, of course, high fines and penalties on top of incarceration.

He was investigated by the IRS-CI.

To learn more about this case, click this link, or copy the URL below:

https://www.justice.gov/opa/pr/pittsburgh-tax-attorney-and-owner-iceoplex-convicted-employment-tax-fraud

Article #3

Former Virginia Software Company President Sentenced to Prison For Employment Tax Fraud

Charge: Conspiracy to Defraud the Federal Government by Failing to Pay Employment Taxes

Allegations: Using Payroll Taxes to Hide Company’s Tailspin From Board of Directors

In 2018, a Virginia woman, Kristie Lynn McDonald, was sentenced to 15 months in federal prison for failing to pay employment taxes. McDonald was Vice President of a software company, and it was in this capacity that she committed the offense.

According to the DOJ press release, McDonald conspired with the software company’s CEO, Robert Lewis. From 2011-2013 they paid some employees with manual paychecks, withholding the correct payroll tax from the employee pay.

But the manual checks allowed McDonald and Lewis to take the withheld money instead of paying it to the IRS as the law requires. In total, they defrauded the federal government of around $1.8 million.

The money was used to hide the fact that the software company was financially failing from the board of directors. The conspirators also diverted over $225,000 from employee retirement accounts. That money went to pay their own salaries, cover operating expenses, and give out employee raises.

After pleading guilty, McDonald received a 15-month sentence in federal prison for her role in the scheme. She will also face three years of supervised release and pay over $1.8 million in restitution. Lewis also pled guilty and awaits his own sentencing. Both pleas came after an investigation by the IRS-CI.

To learn more about this case, click this link, or copy the URL below:

https://www.justice.gov/opa/pr/former-virginia-software-company-vice-president-sentenced-prison-employment-tax-fraud

We Can Help You Defend Against Charges of Employment Tax Fraud

Any criminal allegations are scary. We know that, and we know tax law inside and out.

The federal government has teams of accountants and investigators dedicated to employment tax fraud. We give clients their own team of experts.

We also know what the government can and cannot do. And last but not least, we know how to get justice for our clients. With IRS-CI closing in, you need to make the right phone call to the right legal team. If that call comes to us, we will answer with pride and help you weather the storm.

If you or someone you care for is under investigation for or being charged with employment tax fraud, call our firm today for a free legal consultation.