A growing number of employers are failing to remit payroll taxes, with 1.4 million employers owing approximately $45.6 billion in unpaid employment taxes, interest and penalties as of December 2015, according to a new report.
The report, from the Treasury Inspector General for Tax Administration, recommended the Internal Revenue Service improve its strategy for addressing "egregious employment tax crimes." TIGTA noted that when employers fail to account for and deposit employment taxes, which they hold in trust on behalf of the federal government, they are in effect stealing. When employers fail to remit the payments, general tax revenues must be used to make up for the difference in the Social Security and Medicare trust funds.
Employment tax noncompliance is a serious crime, TIGTA noted, and embezzlement of employment taxes is a felony that can land offenders up to five years in prison.
The IRS’s Collection function uses the Trust Fund Recovery Penalty as a civil enforcement tool to discourage employers from continual noncompliance with the tax laws. In fiscal year 2015, the IRS assessed the penalty against approximately 27,000 employers, but that was 38 percent fewer than in fiscal year 2010, mainly because the IRS didn’t have as many revenue officers working at the agency. Meanwhile, the number of employers who have been delinquent on payroll taxes for 20 or more quarters has been growing, more than tripling over a 17-year period. Even though willful failure to remit employment taxes is a felony, prosecutors obtain fewer than 100 criminal convictions each year.
“Employment tax embezzlement is an especially egregious crime because the employer or payroll service provider violates their fiduciary responsibility to remit the taxes on behalf of their employees,” said TIGTA Inspector General J. Russell George in a statement. “Furthermore, the programs funded by employment taxes provide essential benefits to many citizens.”
TIGTA recommended the IRS develop a more focused strategy to address egregious employment tax cases. The report suggested the IRS Collection function expand the criteria it uses to refer potential criminal cases to the IRS Criminal Investigations Division to include cases involving over $1 million, or individuals involved in 10 or more companies that fail to remit payroll taxes.
IRS officials agreed with TIGTA on developing a focused strategy, but disagreed with the suggestion that the Collection function should expand the criteria it uses to refer cases to Criminal Investigation. The IRS cited limited resources and the need to balance several factors involving stakeholders.
“The IRS’ comprehensive strategy around employment tax compliance and enforcement utilizes a multi-pronged, tailored and data-driven approach, so as to apply the appropriate civil and/or criminal enforcement tools to effectively address the different strains and degrees of employment tax noncompliance,” IRS Criminal Investigation chief Richard Weber wrote in response to the report. “One of our first Future State initiatives, and a keystone of our civil compliance activities around employment taxes, is to improve voluntary compliance and protect the government’s interest in these amounts.”
For its part, TIGTA argued it believes that more egregious cases should be referred for criminal investigation, including cases involving over $1 million and cases with individuals involved in 10 or more companies that failed to remit payroll taxes to the IRS.
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