Typical Criminal prosecutions involve a closely held business, where the, owner, majority shareholder or officer controls the finances of a business and has access to and custodial control over Employee Withholding Taxes collected from the Company’s Employees. The control person uses the collected Employment Taxes for purposes other than for the payment of withholding taxes to the Internal Revenue Service In order to carry out this scheme, the Employer either makes a conscious decision to not file the required quarterly and annual returns, or files false Employment Tax Return, substantially underreporting his Employees’ compensation as well as the Employment Taxes withheld.

Collected employment taxes should be segregated from other business bank accounts. As a fiduciary, the Employer has an absolute duty to safeguard these funds and the failure to do so can have dire consequences. The Employer also has an affirmative duty to file quarterly and annual payroll tax returns, which accurately reflect the correct amount of Employee Withholding Taxes, as well as the Employer’s contributions for its portion of Social Security and Medicare taxes. In addition to safeguarding the funds collected from its Employees, and filing timely payroll tax returns, an Employer is charged with the responsibility of remitting the taxes withheld to the IRS.

Some employers elect to outsource the payroll function to a third party such as ADP, Mini-Data, Paychex and others. A Payroll Service Providers (PSP) collects the taxes and pays those taxes to the IRS. In addition, the PSP prepares quarterly and annual payroll tax returns on behalf of the Employer, issues Employees regular payroll checks via direct deposit, provides employees with regular pay stubs and issues Form W-2 to the client’s employees. This is the preferred method to handle employee compensation, Employment Withholding Taxes and the preparation and filing of quarterly and annual payroll tax returns, particularly where the business is small and has a limited number of Employees. The PSP automatically withdraw from the Employer’s payroll account each pay period an amount sufficient to cover the Employee’s compensation, the Employee Withholding Taxes and the PSP administrative fees.

The other third party payers are Professional Employer Organization (PEO), whose services include handling the administrative, personnel and payroll accounting functions for employees.

While PSP’s and PEO’s generally provide quality services, there are instances where these organizations have collected employee withholding taxes, but failed to remit them to the IRS. After Withholding Employee Taxes from many its clients, The PSP or PEO simply dissolves its business, relocates and forms a new entity using a different name. The PSP or PEO then repeats the process of defrauding clients.

Other Employers elect to handle the payroll function “in house.” For those Employers who have proper internal controls and the infrastructure in place to handle the regular reporting and the remittance of any Withholding Taxes due, payroll tax compliance is seldom a problem.

However, some Employers consider collected Employment Taxes their personal piggy bank to be used for personal expenses and the purchase of luxury items or gifts for family and friends. Often times, an Employer rationalizes that taking Withheld Employment Taxes is an interest free loan from the government. The Employer further reasons that he can repay this government loan if and when he sees fit. In other cases an Employer’s business model is based on a continued failure to pay Employment taxes or the filing of false payroll tax returns substantially underreporting Employee compensation.

An Employer who engages in this type of conduct is engaged in criminal conduct and will probably face prosecution, imprisonment, monetary fines and restitution.

The list below represents some, but not all schemes employed by Employers, PSP’s and PEO’s. If you are delinquent in your payroll tax obligations and have used your Employee Withholding Taxes, you are certainly at risk and should immediately contact a tax attorney to discuss remedial measures. Some of the Schemes for which Employers are as follows:

If you find yourself in any of the above situations, you definitely need to consult a Tax Attorney to determine the best course of action for coming into compliance.