Employment tax evasion (also called payroll tax evasion or employment tax fraud) is committed by an employer who keeps employee tax withholdings rather than paying them to the IRS. Employers are required by law to withhold certain taxes, such as the Social Security and Medicare taxes, from their employees’ paychecks, but some employers fail to pay this employment tax. Failure to pay can result in both criminal and civil penalties including possible fines and prison time. This variant of tax fraud can take many forms.
Let’s take a look at some of the most common to better understand employment tax evasion. Keep reading to learn more!
A Few Things You Need to Know
Pyramiding
Employers who continually withhold taxes from their employees but fail to pay them to the IRS are committing employment tax evasion through pyramiding. Businesses who use this practice are often forced into bankruptcy due to an unmanageable accumulation of back taxes.
Cash Payments
Although it is not illegal to pay an employee with cash payments, the IRS still expects to see the appropriate withholdings (surely, you’ve heard of the “nanny tax”). The lack of a paper trail, however, makes it extremely difficult for the IRS to determine if a business is using this method to avoid paying employment taxes.
Third-Party Evasion
Many businesses use third-party payroll services. When such a third-party collects the proper tax withholdings from its client but fails to pay them to the IRS, it is employment tax evasion. Employers are still liable for this form of tax fraud whether or not they were aware that the fraud was occurring.
Offshore Employee Leasing
This form of employment tax evasion occurs when an employee resigns from his or her position but then returns to the same position and salary under a contract arranged by an offshore leasing company. The employee’s income is now deposited into an offshore account as “deferred compensation” (a portion of earned income to be paid out at a later date, such as a pension). Many have incorrectly claimed that no taxes are owed for such arrangements, but the IRS disagrees.
Employee Status Misclassification
Employers are only required to withhold and pay employment taxes for their own employees, or the people directly hired by them to do a specific job in a specific way. Some employers intentionally misclassify their employees as independent contractors in order to avoid paying.
Payroll Tax Return Schemes
Employers have tried to get away with employment tax evasion by filing false tax returns that understate the wages paid to their employees and the taxes owed. Others avoid paying employment taxes by not filing at all.
Improper Corporate Distributions
A corporate distribution is not taxable if it is not a profit, so employers sometimes improperly treat executive compensations (payments/benefits given to senior business executives in exchange for work on behalf of the company) as corporate distributions in order to avoid paying the applicable employment taxes.
The Newark Tax Evasion Lawyer You Can Count On
As you are no doubt aware, the IRS goes to great lengths during their investigations, so if you find that you’re the subject of just such an investigation, seeking out the advice of a law firm is the way to go. Fortunately, the Law Offices of Robert J. DeGroot will be there to help. With nearly five decades of experience defending clients against all kinds of charges, we can lend a helping hand no matter what it is that you’re up against.
Employment tax evasion is an offense that the IRS takes extremely seriously. If you need a tax evasion lawyer in the Newark, NJ, area contact the Law Offices of Robert J. DeGroot.
