TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

Over the last five years, enforcement of employment tax violations has become a priority to the Internal Revenue Service and the Department of Justice, Tax Division.  Notwithstanding the increase in enforcement, the increasing cost to the Treasury indicates the increased attention to employment tax violations has not been enough – – and the Treasury Inspector General for Tax Administration (TIGTA) has just issued a report noting that criminal enforcement must increase.  Interestingly, the report refers to employment tax violations as “employment tax embezzlement, a felony punishable by up to five years in prison.”

On March 21, 2017, TIGTA issued a report to the Commissioner for Small Business/Self-Employed Division and the Chief for Criminal Investigation (CI) Divisions(Report No. 2017-IE-R004).  TIGTA recommended that the Commissioner and the Chief of CI should consider a strategy to address “egregious employment tax cases.”  Importantly, they recommended that the Collection function should expand the criteria used to refer potential criminal cases to CI, to include cases such as those over $1 million or individuals involved in ten or more companies that fail to remit payroll taxes.  The Collection Division indicated that they did not want to expand the criteria to refer cases to CI, given the balancing factors and importantly “limited resources.”  TIGTA however, indicated that additional “egregious” cases should be referred for criminal investigation and prosecution.

The report found that employment tax noncompliance is a growing problem.  As of December 2015, 1.4 million employers owed approximately $45.6 billion unpaid employment taxes, interest and penalties.  It noted that in fiscal year 2015, the IRS asserted trust fund recovery penalties against approximately 27,000 responsible persons, 38% fewer than just five years before.  They attribute this to a diminished resources to the Internal Revenue Service.  On the other hand, the number of employers with employment tax compliance for 20 or more quarters has been steadily growing – – more than tripling in a 17-year period.

Importantly, the Report found that even the use of the trust fund recovery penalty did not stop the abuse, finding that a review of a number of taxpayers who had been assessed the trust fund recovery penalty who had ten or more entities involved, only 8.5% of the individuals had been investigated by the Criminal Investigation Division.

The Report also noted that of approximately the 700 individuals who were assessed in excess of $1 million during the years 2010 to 2015, CI opened investigation on fewer than fifty of these individuals, or approximately 7%.

TIGTA concluded that given the small number of criminal investigations for employment tax violations, the criminal sanction and its goal of general deterrence was not having its intended positive impact on tax compliance.

While we are in a period of limited government resources, employment taxes have become a bigger source of revenue and a larger tax compliance problem.   Expect to see an increase in employment criminal investigations and prosecutions in light of TIGTA’s Report.

STEVEN TOSCHER – For more information please contact Steven Toscher – toscher@taxlitigator.com  Mr. Toscher is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., specializing in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at www.taxlitigator.com

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3200. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the Criminal Division.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, federal and state white collar criminal investigations. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).