WASHINGTON - Employment tax noncompliance is a growing problem, according to a report that the Treasury Inspector General for Tax Administration (TIGTA) published today. TIGTA found that, as of December 2015, 1.4 million employers owed approximately $45.6 billion in unpaid employment taxes, interest, and penalties.
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 from the government. These stolen funds include amounts used to fund important Federal programs including Social Security and Medicare. General tax revenues must be used to make whole the Social Security and Medicare trust funds for uncollected employment taxes. Employment tax noncompliance is a serious crime - employment tax embezzlement is a felony punishable by up to five years in prison.
The objective of TIGTA's evaluation was to determine the levels of payroll tax noncompliance that the Internal Revenue Service (IRS) identified and the extent of civil and criminal enforcement actions that the IRS took.
The Trust Fund Recovery Penalty (TFRP) is a civil enforcement tool the Collection function can use to discourage employers from continuing egregious employment tax noncompliance and provides an additional source of collection for unpaid employment taxes. In FY 2015, the IRS assessed the TFRP against approximately 27,000 responsible persons - 38 percent fewer than just five years before as a result of diminished revenue officer resources. However, the number of employers with employment tax noncompliance for 20 or more quarters of delinquent employment taxes is steadily growing - more than tripling in a 17-year period. Although the willful failure to remit employment taxes is a felony, there are fewer than 100 criminal convictions per 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 J. Russell George, Treasury Inspector General for Tax Administration. "Furthermore, the programs funded by employment taxes provide essential benefits to many citizens," he added.
TIGTA recommended that the IRS consider a focused strategy to address egregious employment tax cases and that the Collection function expand the criteria used to refer potential criminal cases to the IRS Criminal Investigations (CI) Division to include cases such as those involving over $1 million or individuals involved in 10 or more companies that fail to remit payroll taxes. IRS officials agreed with the development of a focused strategy, but disagreed that the Collection function should expand criteria used to refer cases to CI, citing limited resources and the need to balance several factors involving stakeholders. TIGTA continues to believe that additional 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.