Payroll taxes withheld by employers account for nearly 72% of all revenue collected by the IRS. Cheating and noncompliance in this area is one of the biggest problems for the nation’s tax system. Civil and criminal employment tax enforcement is one of the top priorities for the IRS and the Department of Justice. Those employers who willfully fail to pay over and deposit with the IRS employment taxes are not just defrauding the IRS, but also are stealing from their employees.
Section 7202 is used to prosecute persons who willfully fail to comply with their statutory obligations to collect, account for, and pay over taxes imposed on another person. This includes employment tax crimes, which are regularly prosecuted under IRC § 7202.
The main issue in criminal tax cases involving failure to pay over employment taxes is “willfulness”. It must be shown that a defendant voluntarily and intentionally acted in violation of a known legal duty. With respect to employment taxes imposed by the Internal Revenue Code, the legal duty enforced by section 7202 is the obligation to withhold those taxes from the gross wages of employees, to truthfully account for those taxes, and to pay over those taxes to the United States Treasury.
A voluntary, conscious, and intentional act of paying the claims of other creditors, including the wage claims of employees, instead of the trust fund taxes, constitutes a “willful” violation of the duty to pay over. It is the government’s position that a person willfully fails to pay over tax under IRC section 7202 when, instead of paying the trust fund taxes, he voluntarily and intentionally uses the money to pay the claims of other creditors, including wages to employees, with knowledge that the collected funds are due to be paid over to the United States. Evil motive or bad purpose is not necessary to establish willfulness under the criminal tax statutes. Evidence of willfulness is often circumstantial, since direct proof of the required specific intent is ordinarily unavailable.
The following criminal cases, all announced by the DOJ Tax Division in 2022, give examples of the facts that the government focuses on in developing criminal employment tax cases. As you can see, some of these cases involve all kinds of industries and have relatively small amounts of tax liabilities.
A CEO and majority owner of a spa in College Point, New York, pleaded guilty to willfully failing to collect and pay over almost $200,000 in employment taxes to the IRS on behalf of the spa companies he owned and managed. According to court documents, the owner oversaw daily operations at the two spas and related businesses, and directed subordinates to pay cash wages to some employees, concealing almost $1.3 million in cash wages. He faces a maximum penalty of five years prison.
In another case from New York, a NY resident pleaded guilty today to willfully failing to collect and pay over employment taxes to the IRS on behalf of the temporary employment staffing agency he owned and operated. Steven Heppenheimer owned and operated two temporary employment businesses. From 2013 through 2017, Heppenheimer did not file any of the required quarterly payroll tax returns. During that time, Heppenheimer withheld approximately $292,000 in payroll taxes from his employees’ wages, but he did not pay over any of these funds to the IRS. He faces a maximum penalty of five years prison.
A Brooklyn based concrete company owner was sentenced to 30 months in prison for tax evasion and employment tax crimes. Rocco Manzione owned and operated several concrete companies. From 2011 to 2017, Manzione withheld more than $1 million in federal employment taxes from his employees’ wages, but he did not timely file employment tax returns for his companies, nor did he pay the required taxes to the IRS. Instead, Manzione spent these funds on family vacations, multiple mortgages, private school tuition and luxury vehicles. In addition to the payroll tax scheme, Manzione also filed false tax returns and evaded his individual income taxes. He concealed some of his income from the IRS by transferring funds from one of the concrete companies he owned to a bank account in the name of a nominee corporation. In total, Manzione caused a tax loss to the IRS of more than $2.8 million. In addition to the 30-month term of imprisonment, the court ordered Manzione to serve two years of supervised release and to pay approximately $2.8 million in restitution.
In Detroit, Michigan, a federal grand jury indicted Yigal Ziv, an owner of Multinational Technologies Inc. (MTI), a software developer company, for not paying over employment taxes to the IRS. According to the indictment, during 2014-2018, Ziv allegedly collected approximately $691,000 in employment taxes from MTI’s employees but did not file employment tax returns or pay the withheld taxes to the IRS. Even after learning of the IRS’s ongoing criminal investigation in May 2018, Ziv allegedly also did not file MTI’s employment tax returns from the fourth quarter of 2019 through the fourth quarter of 2020 and did not pay over to the IRS approximately $199,000 in payroll taxes withheld from MTI’s employees. During this period, Ziv caused MTI to spend hundreds of thousands of dollars for his own personal benefit, including home mortgage payments, luxury auto lease payments and department store purchases.
A federal district court in New Jersey indicted Joseph Schwartz, the owner of a network of health care and rehabilitation facilities with willfully failing to withhold and pay over employment taxes on behalf of his employees, tax evasion, and failing to file benefit plan reports. According to the indictment, Schwartz owned and operated the Skyline Management Group LLC and several related companies (Skyline), which in turn owned and managed 95 health care and rehabilitation facilities operating in at least 11 states. Although the staffing companies were nominally owned by other individuals, Schwartz controlled their finances and operation. From mid-2017 through June 2018, Schwartz caused, through his nominees, the staffing companies to not pay approximately $38,982,016 in payroll taxes and unemployment taxes due the IRS.
A former Kansas businessman was sentenced to one year and one day in prison for willfully failing to pay over employment taxes to the IRS. According to court documents and statements made in court, Lance Ashley was the sole owner and operator of Ashley Home Care Services (AHCS), a home health care business. Ashley was responsible for all financial matters relating to AHCS, including handling payroll and paying expenses. From 2013 through 2016, Ashley did not pay over to the IRS all the federal tax withholdings collected from the wages of AHCS’s employees, exceeding $321,000 in total. Instead, he used some of the funds to pay corporate and personal expenses. After the IRS initiated enforcement efforts in 2016 to collect AHCS’s unpaid employment taxes, Ashley provided fraudulent bank records to the IRS, did not fully disclose all of the company’s bank accounts, filed false IRS forms and attempted to use a recently formed corporation to conceal AHCS’s operations.
In a case out of Oakland, California, a grand jury charged a California businessman with failing to pay over more than $250,000 in employment taxes to the IRS. According to the indictment, Larry Kudsk operated two construction businesses. For both companies, Kudsk was responsible for filing quarterly employment tax returns and collecting and paying to the IRS payroll taxes withheld from employees’ wages. Kudsk did not timely file employment tax returns, and did not pay withholdings to the IRS, causing a tax loss to the IRS of more than $250,000. If convicted, he faces a maximum of five years in prison for each of the seven counts of failing to pay over employment taxes.
All these cases show a pattern of facts that the IRS and the DOJ look for in a criminal case – control over a business, failure to file tax returns or failure to pay over the collected employment taxes over several years, and often, but not always, a diversion of funds for personal benefit. In some instances, it is sufficient that the withheld taxes are used for other business purposes, like rent or other creditors.
In conclusion, business owners should be mindful of their payroll tax obligations. If the business experiences cash flow problems and fails to collect or pay over employment taxes, the owners should consult with tax advisors as quickly as possible and develop a plan of action in order to prevent significant issues with the IRS.