If You Owe Employment Taxes and You Cannot Fully Pay, You Need a Tax Attorney. Period!
The Criminal Division of the Internal Revenue Service in Los Angeles has recently changed its policy regarding whether the failure to collect and pay employee withheld employment taxes is criminal. I was an Attorney for Chief Counsel of the Internal Revenue Service in Los Angeles in the late 1990s to early 2000s. During that time, the culture of the IRS in Los Angeles was that a failure to collect and pay the employees withheld taxes was only a crime if the IRS could establish classic badges of tax fraud or tax evasion. In addition, at that time you would anticipate that the amount of taxes would have to exceed well over $100,000.
In a recent court document[1], the IRS indicted a business owner of a temporary staffing service for failing to pay employment taxes withheld from his employees. There are three aspects of this case that are most striking and should make business owners quite nervous:
1) Only $68,261 Unpaid Employment Taxes. The indictment purports that the business only only owed $68,261. A shockingly low amount for a tax crime.
2) No Allegations of Tax Fraud or Tax Evasion. The business owner appears to have merely accrued an employment debt and failed to pay it to the IRS. The indictment fails to assert that the business owner committed any standard badges of tax fraud or tax evasion. No assertions of lying. No assertions of hiding assets. No assertions of submitting false documents.
3) No Extravagant Lifestyle. Owner Only Earned $76,351 a Year While Tax Debt Grew. The indictment asserts that he paid himself approximately $76,361 a year during the time the employment tax liability grew. This fact also seems unusual because ordinarily you would expect the Tax Division to develop a tax crime case only where they can make a presentation that the defendant lived an extravagant lifestyle while failing to pay the taxes. This is not a part of this indictment. $76,000 certainly does not appear to be extravagant.
The above indictment represents the IRS wrongful policy to create debtors prison for employment tax debts. We believe it is bad policy for the IRS to pursue ordinary tax debt as crimes.
If you owe significant amounts of employment taxes, we do not recommend that you engage a Certified Public Accountant or Enrolled Agent to negotiate an installment agreement. Anything you say to them is not protected by the attorney/client privilege. All the documents, notes and emails in your accountants’ possession will be obtained by the Criminal Investigator through summonses or grand jury subpoenas. Your accountant will be forced to testify under summons or subpoenas regarding anything and everything they know you had done or said. You have no protections if you engage an accountant to assist you.
We recommend that you engage a qualified Former IRS Tax Attorney to represent you to negotiate the payment of your employment taxes if they exceed $100,000 or there are any additional criminal risk factors.
If you have any questions regarding strategies to reduce or eliminate the risks associated with failure to pay employment taxes, please call Holtz, Slavett & Drabkin, ALPC, at (310) 550-6200.
David C. Holtz is a Corporate Tax Attorney and a principal of Holtz, Slavett & Drabkin, APLC. David was an IRS Attorney in the Office of Chief Counsel of the Internal Revenue Service in Los Angeles. His practice focuses on Corporation Tax matters such as Corporation Tax Audits and Corporate Tax Collection matters.
[1] United States v. David Monhollon, No 18-20021-01-JAR-TJJ