Latest Facts & News

  • FBAR penalties are at an all-time high: As of 2025, non-willful penalties have risen to $16,536 per violation, and willful violations can result in penalties of the greater of $165,353 or 50% of the account balance.
  • Recent Supreme Court ruling: The 2023 Bittner case clarified that non-willful penalties are applied per FBAR form, not per account, reducing potential penalties for many filers.
  • IRS enforcement is increasing: The IRS is leveraging advanced data analytics and international banking agreements to detect unreported foreign accounts, making non-compliance riskier than ever.
  • Automatic extension: FBAR filers now receive an automatic extension to October 15 if they miss the April 15 deadline.
  • Streamlined compliance options: Taxpayers who act quickly and can demonstrate non-willful conduct may avoid penalties through IRS amnesty programs.

Missing or ignoring FBAR filing rules can now lead to some of the harshest financial penalties the IRS has ever enforced. In 2025, non-willful penalties have jumped to $16,536 per violation, while willful violations can mean losing half your account balance, or more. The IRS is using advanced technology, global banking data, and new court decisions to spot even small mistakes, making it much easier for them to find and penalize unreported foreign accounts.

Whether your mistake was an honest oversight or you’re worried about a past filing, understanding the latest FBAR penalty rules is more important than ever. 

This guide answers, What are the penalties for not filing an FBAR, how the IRS decides what’s willful or non-willful, and what real cases can teach you about the risks.

Read on to learn what you could face and how to protect yourself with the help of an FBAR Tax Attorney.

What is the FBAR?

The FBAR, or Foreign Bank Account Report, is a form to be filed by people in the United States who have money in bank accounts outside the country. Its official name is FinCEN Form 114. This application has no connection to taxation; it is merely a notification to the government that the person holds foreign accounts. 

Should your total value in accounts abroad exceed $10,000 at any time during the year, you are required to file an FBAR. This is so that the government can track offshore money and prevent tax evasion.

Who must file an FBAR?

If you are a “U.S. person” and you have foreign financial accounts, you may need to file an FBAR (FinCEN Form 114). The rule is simple: if the total value of all your foreign accounts goes over $10,000 at any time during the year, you must file.

A U.S. person includes:

  • U.S. citizens, even if living abroad
  • U.S. residents, including green card holders
  • U.S. companies, partnerships, and LLCs
  • U.S. trusts and estates

Foreign accounts that count:

  • Bank accounts (checking, savings, CDs) held outside the U.S.
  • Investment or brokerage accounts at foreign institutions
  • Mutual funds or pooled funds based overseas
  • Certain foreign retirement or pension accounts
  • Insurance policies with a cash value held in another country

FBAR Eligibility Checklist:

  • Are you a U.S. person?
  • Do you have a financial interest in or signature authority over foreign accounts?
  • Did the total value of all your foreign accounts go over $10,000 at any time this year?

If you answer “yes” to all three, you must file an FBAR.

FBAR Deadlines and Extensions

The FBAR deadline is essential. Missing it can lead to problems with the IRS.

Key dates →

  • April 15: Standard FBAR filing deadline each year
  • October 15: Automatic extension, no need to apply

What counts as late filing?

  • Submitting your FBAR after October 15 is considered late and may lead to penalties.

What to do if you’re late?

  • File as soon as you realize you missed the deadline
  • Explain your reason for filing late if asked by the IRS

Tip: The FBAR is filed electronically through the FinCEN website, not as part of your regular tax return.

FBAR Penalties Explained

If you don’t file your FBAR (FinCEN Form 114) when required, you could face serious consequences. Many taxpayers wonder what are the penalties for not filing an FBAR, and the answer depends on whether the violation was accidental, intentional, or simply due to negligence. The IRS applies different FBAR late filing penalty levels based on these factors.

Here’s what you need to know:

1. Non-Willful FBAR Violations and Penalties

The IRS views non-willful FBAR violations as acts committed not with the intent of hiding money or evading the law, but due to some honest mistake or genuine ignorance. The matter usually concerns a person who was unaware of the rules or misunderstood their responsibilities.

Non-willful penalties are civil, not criminal; these cases generally come with the possibility of having the penalty waived if the taxpayer acts promptly and in good faith.

How does the Penalty Work?

In cases of a non-willful violation, the IRS can impose a civil penalty of up to $10,000 per FBAR filing. This amount is adjusted for inflation in 2025; the maximum will be $16,536 per form filed.

In 2023, the Supreme Court confirmed the penalty applies once for each unfiled FBAR, rather than once for each foreign account (Bittner v. United States).

In simpler terms, the penalty attaches to the FBAR itself and not the accounts reported in that FBAR. That’s a huge difference; it can mean a penalty of $16,536 vs. $165,360.

When Can You Avoid the Penalty?

The IRS will reduce or waive the penalty if you can prove that you had reasonable cause, meaning you attempted to follow the rules but were unsuccessful.

Examples of situations that may qualify:

  • You actually relied on a tax preparer and were able to provide complete and accurate information. 
  • You were simply unaware that foreign accounts inherited needed to be reported. 
  • You have no prior issues with FBAR or criminal tax history. 
  • You’re either unfamiliar with finances or the law. 
  • You faced unexpected events that affected your ability to comply

The IRS looks into the facts of each case, how you took corrective action for the mistake, and whether you declared the income from the foreign accounts.

What to Expect from the IRS?

In non-willful cases, the IRS may commence an examination into your situation. This process may include:

  • Checking your financial records
  • Investigating your understanding of FBAR rules
  • Reviewing whether you reported all the foreign income and paid the right kind of tax
  • Assessing whether your conduct was inadvertent or careless

The IRS may consider whether you corrected the matter on your own initiative before any contact.

Options to Fix the Problem

If you missed the filing deadline, there are options available to help you catch up and reduce penalties. The Streamlined Filing Compliance Procedures is one IRS program that helps taxpayers fix non-willful FBAR issues. It allows you to file late forms and possibly avoid penalties altogether.

Non-willful violations can still result in penalties, but they don’t have to be overwhelming, especially if you respond promptly and take the necessary steps.

Case Study: Bittner v. United States
A Supreme Court Ruling That Changed FBAR Penalties for Good

A taxpayer failed to file the required FBARs for multiple years. An FBAR was supposed to report several foreign bank accounts. When the IRS reviewed the case, they didn’t treat the mistake lightly, even though it wasn’t intentional.

They were considering what they labelled a non-willful violation, i.e., meaning that the taxpayer truly did not mean to break the law. However, penalties of $10,000 were imposed by the IRS for each year in which the FBARs were not filed. This resulted in a staggering $2.72 million in total penalties.

The taxpayer challenged the amount of the penalty, claiming that the law allows the IRS to impose only one penalty per FBAR form, not per account.

What did the Supreme Court decide?

In 2023, the Supreme Court entered the fray, issuing a landmark ruling in Bittner v. United States.

The Court ruled that for non-willful FBAR violations, the penalty should apply once per form, not per account.

Therefore, even if the taxpayer had 20 unreported accounts in a single year and filed no FBAR, the IRS could only apply one penalty for that year, not 20 separate penalties.

In Bittner’s case, that reduced the total penalty from $2.72 million to just $50,000

2. Willful FBAR Violations and Penalties

A willful FBAR violation happens when the IRS believes you intentionally ignored the filing requirement or acted with reckless disregard. This means you were aware of the FBAR rules but chose not to comply or attempted to conceal your foreign accounts.

How Does the Penalty Work?

For willful violations, the penalty is much higher. In 2025, it is the greater of:

  • $165,353 per violation, or
  • 50% of the highest balance in the unreported foreign account during the year, per account, per year.

The IRS can apply this penalty for each account and each year you failed to file.

What Counts as Willful?

  • Ignoring clear warnings about FBAR filing
  • Deliberately hiding foreign accounts
  • Providing false information or incomplete disclosures
  • Acting with reckless disregard for the law

Can Willful Violations Lead to Criminal Charges?

Yes. While most FBAR penalties are civil, willful violations can sometimes result in criminal prosecution. This can include:

  • Fines up to $250,000
  • Prison time up to 5 years

If the violation is part of a larger illegal scheme or pattern, penalties can increase to:

  • Fines up to $500,000
  • Prison time up to 10 years

What to Expect from the IRS?

The IRS will conduct a thorough investigation, which may include →

  • Reviewing bank records and financial transactions
  • Interviewing you or your representatives
  • Coordinating with other government agencies

You may face both civil penalties and criminal prosecution.

How do you respond if you face willful penalties?

  • Consider voluntary disclosure programs if you want to come into compliance before the IRS contacts you
  • Gather all relevant documents and be prepared to cooperate fully

Case Study: United States v. Schwarzbaum (2024)
Willful FBAR Penalties Upheld by 11th Circuit

Isac Schwarzbaum was a U.S. citizen who held over $20 million in foreign accounts between 2006 and 2009. He did not file truthful FBARs and failed to report income from these accounts, despite having read the instructions to do so and consulted with accountants. Since the IRS viewed his actions as indicative of reckless disregard of the law, it treated the violation as willful.

The IRS assessed penalties using a per-account, per-year system; fines of up to millions of dollars were imposed, based on whichever was greater: $100,000 or 50% of the highest account balance for each year. 

What did the courts decide?

The 11th Circuit Court of Appeals held two essential rulings in 2024:

  • It confirmed that recklessness is sufficient to establish willfulness under FBAR.
  • FBAR penalties are subject to the Eighth Amendment and must be proportionate to the severity of the violation.
  • The court upheld penalties on the larger accounts but reduced the fines imposed on a few smaller ones, as it found them excessive.

The final result was a $13.4 million penalty, with the court confirming that recklessness is equivalent to willfulness, excessive fines can be reduced, and large penalties remain enforceable.

Read More Willful FBAR Penalty Case Study

3. Negligence Penalties (for Businesses)

A negligence FBAR violation typically applies to businesses or entities, rather than individuals. Negligence means the company failed to use reasonable care or made careless mistakes in meeting its FBAR filing obligations. This is different from non-willful (honest mistake) and willful (intentional) violations.

How Does the Penalty Work?

  • For simple negligence, the penalty is $1,430 per violation in 2025.
  • If the IRS finds a pattern of negligence, meaning repeated or consistent careless behavior, the penalty can go up to $111,308.

Who Can Be Affected?

  • Banks, corporations, partnerships, LLCs, trusts, and other U.S. entities with foreign accounts may face penalties for negligence.
  • These penalties are rare for individuals but can be applied if a business fails to establish proper systems for FBAR compliance.

What Counts as Negligence?

  • Failing to set up procedures to track and report foreign accounts
  • Ignoring reminders or notices about FBAR requirements
  • Repeated mistakes in filing or reporting

What to Expect from the IRS?

  • The IRS may review your business’s compliance systems and past filings.
  • They may look for signs of a pattern, such as missing FBARs over several years or for multiple accounts.

How Can You Fix Negligence Issues?

  • Review your business’s compliance procedures regularly.
  • Train staff responsible for financial reporting.
  • If you discover a mistake, file the correct forms as soon as possible and explain what happened.

Can Penalties Be Reduced or Avoided?

  • If you can show that your business took reasonable steps to comply and the mistake was not part of a pattern, the IRS may reduce the penalty.
  • Acting quickly and improving your internal controls can help demonstrate good faith.

Negligence penalties are serious, especially for businesses with ongoing compliance issues. Regularly reviewing your reporting process and acting promptly if you identify an issue can help you avoid these costly penalties.

Now that we’ve covered what are the penalties for not filing an FBAR, let’s take a closer look at how long the IRS has to enforce those penalties—and what the statute of limitations means for your case.

Bonus FBAR Penalty Relief For Taxpayers

The Statute of Limitations for FBAR Penalties

The statute of limitations is the time limit the IRS has to assess FBAR penalties. For most FBAR cases, the IRS has six years from the original due date of the FBAR to review your filing and assess a penalty.

Options for Delinquent FBAR Filers

If you missed the FBAR deadline, there are several ways to catch up and possibly reduce or avoid penalties. The right option depends on your situation and whether your mistake was non-willful or willful.

  • Delinquent FBAR Submission: If you forgot to file an FBAR but reported your income and paid your taxes, you can file it now on the FinCEN website without facing penalties, as long as you’re not under IRS investigation. 
  • Streamlined Filing Compliance: If you missed FBARs and some foreign income but your errors were unintentional, you can file the last three years of tax returns and six years of FBARs, pay any taxes owed, and certify your mistake to potentially reduce or eliminate penalties. 
  • Voluntary Disclosure: If you may have willfully not filed FBARs or have bigger issues, this program allows you to disclose everything to the IRS, pay the taxes and higher penalties, and avoid criminal charges if done before the IRS contacts you.

Important Note

Do not simply file late FBARs (“quiet disclosure”) without using an official IRS program. This can increase your risk of full penalties and further IRS scrutiny.

How to Respond If You Receive an FBAR Penalty Notice?

If the IRS sends you an FBAR penalty notice, do not sit on it for long. Read the notice carefully to find out why you were penalized and what it is that the IRS asserts you did wrong. There are usually time constraints that limit your ability to respond.

  • Review the notice and gather your records.
  • If you believe the penalty is improper, you may appeal by following the directions in the notice. 
  • Respond within the deadline and provide any supporting documents for your claim.
  • If you are unsure about what to do, seek professional assistance immediately.

Note

Suppose you disagree with assessing an FBAR penalty. In that case, you may appeal to the IRS’s Independent Office of Appeals, which may, depending on your circumstances, reduce or remove the penalty or penalties. FBAR penalties are not considered taxes; therefore, the U.S. Tax Court does not have jurisdiction over these cases. You must further challenge decisions by prosecuting your case in federal district court or the Court of Federal Claims.

Don’t Ignore FBAR Rules!
Immediate Action Counts Much

FBAR violations and penalties exist, and enforcement of FBAR rules is more rigorous than ever. If you have any foreign accounts, make sure you know your business, remain on the filing deadline, and correct any errors once faced with them. Early action can save you from a heavy dollar fine and from truckloads of stress.

If you have questions or need help with FBAR issues, Verni Tax Law is here for you. We can guide you through your options and help you move forward with confidence. Don’t wait; reach out today and get the support you need.

FAQs

  1. Can FBAR penalties be waived?

Yes, in some cases. The IRS may waive or reduce FBAR penalties if you can show reasonable cause, meaning you made a genuine effort to comply but still missed the requirement. This could include relying on incorrect advice from a tax professional or facing personal hardships. Acting quickly and correcting the mistake can improve your chances.

  1. What if I didn’t know I had to file an FBAR?

If you truly didn’t know and the mistake wasn’t intentional, the IRS may treat it as a non-willful violation. These usually carry lower penalties and may be waived if you show reasonable cause. But if they believe you ignored clear signs or were reckless, the penalties can still be serious.

  1. How far back can the IRS assess FBAR penalties?

The IRS can generally go back six years from the date the FBAR was due. For example, if you didn’t file an FBAR in 2018 (due in 2019), they can still assess penalties until 2025.

  1. Does the IRS audit for FBAR violations?

Yes. The IRS reviews FBAR compliance during audits, especially if it sees signs of unreported foreign income. They also receive foreign bank data through international agreements and may match it against your tax returns to find FBAR issues.

  1. What is the difference between FBAR and FATCA reporting?

Both FBAR and FATCA involve reporting foreign accounts, but they serve different purposes:

  • FBAR (FinCEN Form 114): Required if you have over $10,000 in foreign accounts in total. Filed separately with FinCEN, not the IRS.
  • FATCA (Form 8938): Form 8983 is required if your foreign assets exceed certain thresholds (starting around $50,000 for individuals). Filed with your tax return.

You may need to file both if your accounts and assets meet the filing rules.

  1. How long do I need to keep records for my foreign accounts after filing an FBAR?

You should keep all records for at least 5 years from the FBAR’s due date. This includes the account number, bank name and address, account type, and the highest balance during the year. The IRS or FinCEN can ask to see these records anytime within that period, so it’s best to keep them safe and organized.

By: Anthony N. Verni, Attorney at Law, CPA

August 13, 2024

®2024

EMPLOYMENT TAX AUDITS ON THE RISE

SECTION 6672 PENALTY AND CRIMINAL PROSECUTION

Employment tax audits are on the rise and so too is the exposure to those individuals  deemed “responsible,” who are charged with the responsibility of properly reporting employee wages and collecting and paying over to the IRS employee withholding taxes as well as the employer’s share of Social Security and Medicare taxes. The heightened IRS scrutiny will, in all likelihood, result in certain officers, directors and other employees being subject to the 26 U.S.C. § 6672 Trust Fund Recovery Penalty (“”TFRP”).

A responsible party may also be subject to the TFRP in situations where he or she either deliberately or mistakenly classified employees as independent contractors, or where the party charged with reporting provides false information to the IRS.

A responsible person within the meaning of Section 6672 includes an officer or employee of a corporation who is under a duty to collect, account for, or pay over the withheld tax. Mazo v. United States, 591 F.2d 1151, 1153 (5th Cir.), cert. denied, 444 U.S. 842, 100 S.Ct. 82, 62 L.Ed.2d 54 (1979) Responsibility is a “matter of status, duty and authority, not knowledge.” Id. at 1156. Indicia of responsibility include the holding of corporate office, control over financial affairs, and the authority to disburse corporate funds, stock ownership, and the ability to hire and fire employees. More than one person may be a responsible officer of the corporation under § 6672. Roth v. United States, 779 F.2d 1567, 1571 (11th Cir. 1986).

In cases where indicia of employment tax fraud are uncovered, individuals also risk being criminally charged.

Prosecutions for employment tax fraud can result in severe consequences including fines, penalties, and even imprisonment. The Internal Revenue Service (IRS) as well as state tax authorities have investigative units dedicated to detecting and prosecuting employment tax fraud.

In General, employment tax fraud is uncovered during employment tax audit. As part of the audit process, IRS agents gather evidence surrounding the activities and financial condition of the business. The audit process usually includes reviewing financial records, interviewing employees as well as the principals of the business.

In particular, agents will look to see if a business is engaged in the commingling of business and personal funds. Agents will also seek to identify preferential payments to creditors and insiders, payments of personal expenses, large luxury purchases as well as other expenditures not considered to be ordinary and necessary business expenses.

It’s important for individuals and businesses to comply with employment tax laws and regulations to avoid being subject to the TFRP and a potential employment tax fraud prosecution.

Seeking guidance from tax professionals or legal advisors can help ensure compliance and minimize the risk of being subject to the Section 6672 penalty and potential criminal prosecution.

Understanding the IRS  audit procedures is essential if you hope to avoid becoming personal liability or subject to criminal charges.  Most TFRP assessments and criminal prosecutions contain common fact patterns.

The following is a sampling of recent employment tax fraud cases.

 

  1. West Virginia Business Owner Charged with Employment Tax Offenses. On July 23, 2024 a federal grand jury in Charleston, West Virginia, returned an indictment charging a West Virginia man with not paying employment taxes. Between the third quarter of 2018 to 2023, the taxpayer did not pay to the IRS the Social Security, Medicare and federal income taxes that were withheld from employees. He also failed to file quarterly tax returns. Instead of paying his share of employment taxes, the taxpayer used his business bank account to pay his personal expenses and diverted funds to his wife, who was not an employee.

 

  1. Former CEO of Startup Software Company Pleads Guilty to Payroll Tax Fraud Scheme. On July 22, 2024 a New Hampshire man pled guilty to not paying more than $14 million in employment tax. The defendant, Andrew Park, was the co-founder of a startup technology company and considered the responsible person for all financial matters related to the company including filing quarterly employment tax returns and collecting and paying over Social Security, Medicare and income taxes withheld from employees’ wages to the IRS as well as the employer’s shares of Social Security and Medicare taxes. From 2014 until the third quarter of 2021, the defendant withheld federal, state and local taxes from his employees, but did not pay them over to the tax authorities. As a result of the defendant’s actions, the U.S. Government sustained a tax loss in excess of $14, million.

 

  1. Virginia Woman Sentenced for employment tax fraud. On June 27, 2024 a Virginia business woman was sentenced to one year and three months in prison and payment of $950K in restitution for not paying employment taxes to the IRS. According to documents and testimony taken in court, the defendant was the owner of parcel delivery service from 2013-2018. The defendant withheld employment taxes from her employees, but failed to pay them to the IRS.  To frustrate IRC collection efforts, the defendant opened new bank accounts using other individual’s social security numbers, new employer ID numbers and a variation of business names. Instead of paying the business employment taxes, the defendant withdrew $450,000 with the total tax loss to the IRS approximating $950,000.

 

  1. Michigan Shipping Magnate Charged with Filing False Tax Returns and Employment Tax Crimes. On June 12, a Michigan man was charged 15 counts of employment tax fraud in addition to filing false tax returns. The charging document alleges that defendant operated a transport business and was responsible for withholding Social Security, Medicare and federal income taxes.

 

  1. Defendant Thwarted IRS Collection Efforts by Hiding Assets from the IRS. On May 7, 2024 a Virginia business man was sentenced to 78 months in prison for evading the payment of employment taxes, filing false returns and obstructing the IRS. According to the evidence presented at sentencing, the defendant owned and operated an ambulance business from 2008 to 2009. During this time defendant was responsible for paying approximately $200k in payroll taxes. After the business failed to pay the employment taxes, the IRS assessed the 100% trust fund penalty. To avoid paying the employment taxes, the defendant claimed that he did not have the assets to satisfy the trust fund penalty. In fact, the defendant owned several beach front condominiums, multiple interests in foreign financial accounts as well as a muscle car collection. In efforts to avoid detection and frustrate IRS collection efforts, the defendant filed false income tax returns for the tax years 2013-2018 wherein rental income from the taxpayer’s Caribbean properties was omitted and false deductions claimed.

 

  1. West Virginia Ambulance Services Business Owner Convicted of Tax Crimes. On May 3, 2024, a federal jury convicted a West Virginia man for failing to pay taxes withheld from Stat EMS, LLC, an ambulance service business located in Pineville, West Virginia. EMS, a nominee entity, was created after the defendant accrued millions of dollars in employment tax liabilities from the operation of a prior ambulance business.

Often time’s unsuspecting business owners and others considered to be responsible parties choose to deal with the IRS without representation resulting in the assessment of the Section 6672 penalty. This usually occurs after the individual participates in the audit and interview processes. Business owners or other responsible parties are usually unaware that statements made to an IRS Agent during the employment tax audit or interview serves as the basis for the assessment of the TFRP. In more severe cases, these statements have been used for criminal prosecution.

Thus, the importance of having a knowledgeable and experienced Tax representation cannot be overstated. The assessment of the TFRP or a criminal prosecution can be a life altering experience, often times resulting in financial ruin or the break up of your family.

An IRS employment tax investigation generally includes interviewing potentially responsible persons, before making an assessment. The period in which the IRS may assess the TFRP against a responsible person is the same period during which the IRS may assess against the employer for the underlying employment tax liability.

Before the IRS can assess the penalty, it must send Letter 1153 (DO) 10-Day Notification Letter, 100% Penalty Proposed against Filer for Corporation, to the taxpayer informing him or her of the Proposed assessment. In Letter 1153, the IRS encloses Form 2751, (Proposed Assessment of Trust Fund Recovery Penalty), setting forth the periods and amounts of the proposed TFRP assessment, and Offering the taxpayer an opportunity to appeal the proposed assessment to the Office of Appeals. The Taxpayer has 60 days from the date of the letter to submit a written request for appeal.

After Letter 1153 and Form 2751, Proposed Assessment of Trust Fund Recovery Penalty, have been properly delivered, (IRM 5.7.4.7), Notification of Proposed Assessment, the responsible person has 60 days (75 if the letter was addressed outside of the United States) from the date of the mailing of the notice or the date of personal delivery to respond.

The IRS must provide each person being interviewed with Notice 784, (“Could You is personally Liable for Certain Unpaid Federal Taxes?”) They must also provide sufficient copies of Notice 784 to allow distribution to all other persons associated with the business who, based on the interview and other preliminary investigation, may be liable.

Form 4180 (Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes) is the form to be used for conducting TFRP interviews. It is intended to be used as a record of a personal interview with a potentially responsible person IRM 5.7.4.2.4; IRM 5.7.4.2.7. During the initial contact the agent will attempt to personally secure Form 4180 from all potentially responsible persons to the extent possible. If Form 4180 cannot be secured, the agent will document the case history with the reasons why it was not secured.

The purpose of the personal interview and completion of Form 4180 is to secure direct, detailed information regarding the individual’s or other person’s involvement in the business in order to determine if they meet the criteria for responsibility (IRM 5.7.3.4.1, Establishing Responsibility) and willfulness (IRM 5.7.3.4.2, Establishing Willfulness). The questions on the form are intended as a guide and are not all inclusive; supplemental questions may be asked.

Generally, if the agent is attempting to secure Form 4180, you should state during any interview that you wish to consult with an authorized representative, at which time the agent is required to suspend the interview to permit such consultation IRM 5.1.10.7.1.

Employment tax compliance is considered a priority to the IRS. Consequently, if you are contacted by the IRS concerning employment taxes you should be concerned.  It is important to be proactive. Do not let fear control you into paralysis.  Engaging an experienced attorney is the best place to start. If you are represented the IRS will not try to put words in your mouth and is less likely to accuse you of lying to an agent.

 

Earlier this year a Charlotte man was charged with tax fraud in a 20 count criminal indictment, charging him with aiding and assisting in the preparation and filing of false returns over a five year period.

According to the allegations, between 2014 and 2021 the Defendant, Tijan Mboob (“Mboob” or the “Defendant”) prepared hundreds of fraudulent returns. The indictment further alleges that the Defendant was a “Ghost Preparer,” who failed to identify himself as a paid tax preparer on the tax returns he submitted to the IRS on behalf of his clients, despite the fact he was compensated for his services.

The IRS requires paid return preparers to provide information, including name, address and phone number for the preparer, Federal Tax Identification or Social Security Number and PTIN number as well as other information.

The indictment specifically alleges that Mboob prepared tax returns on behalf of his clients which contained fabricated and fraudulent items. Some of the items included false filing status, false American Opportunity and education credits, false itemized deductions and false reforestation credits. The hundreds of fraudulent returns prepared by the Defendant resulted in the overall reduction in tax liability on behalf of his clients and their receipt of large refunds totaling $4.7 million dollars.

Finally, the indictment indicates that the Defendant failed to report any of the preparation fees he eared as income for 2017 and 2019, and in addition, failed to file returns for 2019 and 2019.

Each Year the IRS warns the public about return preparer scams.  However, there is no shortage of victims, who fall prey to these predators each year.

While the Ghost Preparer is also a paid preparer, he differs from the fraudulent return preparer who provides identifying information on the tax returns he or she prepares. The Ghost Preparer will submit a fraudulent tax return and designate the tax return as “Self-Prepared.” In doing so, he or she will deliberately omit any paid return preparer information at the bottom of the tax return. Clients are delighted to learn that they are getting a $10,000 refund, only to later discover that it was too good to be true.  How is this possible?

Its possible thanks to the illegal business practices some return preparers engage in. Most are unlicensed and not subject to Circular 230. In addition, many conduct business using a nominee as the face of the tax preparation business. These charlatans are generally are able to grow their practices based solely on their ability to generate large taxpayer refunds for their clients and by word of mouth.

The return preparer, who engages in these illegal acts, will have a federal identification number, as well as PTIN and ERO numbers. These preparers are monitored by the IRS, who, through AI and analytics is able to identify patterns in certain types of deductions, business losses, credits and withholding.  Many of these preparers have been identified and either civilly enjoined from preparing tax returns or criminally prosecuted. The ones who escape prosecution simply set up shop down the road, making use of new nominee.

A Client who receives a large tax refund to which he or she is not entitled may be thrilled and think he or she hit the jackpot.  That joy quickly gives way to fear and anxiety when the Taxpayer receives a notice from the IRS. In certain cases, it can involve multiple years.

The morale of the story is choose your return preparer wisely and asks lots of questions.  It is always best when selecting a return preparer to select an attorney, certified accountant or enrolled agent, all of whom are subject to Circular 230, which governs the conduct of return preparers.   Further, if a friend or relative recommends a return preparer based on the fact that they systematically receive large refunds, I would be suspicious.

If you have been receiving large refunds, it would be wise to have a tax attorney, certified public account or enrolled agent review your tax return.

On September 21, 2023 a  former CFO of  a Russian natural gas company was sentenced to seven years in prison, ordered to pay $4 million dollars in restitution and an additional $350,000 in fines in connection with a number of tax and financial reporting crimes that included engaging in a scheme to hide millions of dollars in income in undisclosed Swiss bank accounts, submitting false filings with the IRS,  failure to file  a Report of Foreign Bank and Financial Accounts (“FBAR”), making false statement to the IRS, and willfully failing to file tax returns.  The Russian CFO was also named a defendant in a $44 million dollar FBAR Penalty Suit commenced by the U.S. Government  in June of 2023 (See Complaint styled as: United States of America v. Mark Anthony Gyetvay).

INTRODUCTION

31 U.S.C.  § 5314 requires U.S. Citizens and Permanent Resident of the United States to file a “report.”  The FBAR implementing regulations provide that a “U.S Person who has a financial interest in or signature or other authority over a bank, securities or other financial account in another country” is required to file an FBAR “for any year in which the aggregate balance for such foreign financial account or accounts exceeds $10,000 at any time during the calendar year” See 31 C.F.R. § 1010.350(a) and 31 C.F.R. § 1010.306(c) (2011).

31 U.S.C. § 5321(a)(2) authorizes the Secretary of the Treasury  to impose penalties for failure to file an FBAR report. The relevant FBAR penalty provisions include a $10,000 Penalty under Section 5321(a)(5)(B) for non-willful violations (the “Non-Willful FBAR Penalty”), which may be excused where “reasonable cause” can be established as well as a Willful FBAR Penalty for willful violations. The Willful FBAR Penalty under Section 5321(a)(5)(C) is the greater of $100,000 or 50% percent of the amount of the “transaction” or in cases where no FBAR is filed, the balance in the account at the time of the violation.

Persons who fail or refuse to file their FBARS and/or those who fail or refuse to report the income derived from their Foreign Financial Accounts (“FFA’s”) may feel that the Government has overlooked them. Those who have hidden their foreign assets by placing them in the name of a nominee, Shell Company or some other entity may, likewise, now feel they are safe.

Prior to the termination of the Offshore Voluntary Disclosure Program (“OVDP”) in September of 2018, at risk Taxpayers sought protection from criminal prosecution by entering into the OVDP.  Some OVDP participants deliberately omitted large account balance FFA’s from their FBAR filings in order to reduce the Miscellaneous Offshore Penalty.  Other elected to “Opt Out” of the OVDP in hopes of either no penalty or paying the less onerous Non Willful FBAR Penalty.

There were also those who attempted to game the system by foregoing the use of the OVDP or it prior iterations and instead utilizing one of the two Streamlined Procedures as a means of avoiding the costly Willful FBAR Penalty, associated legal costs and possible criminal prosecution.

Taxpayers who intentionally omitted FFA’s with significant balances have been subject to the Willful FBAR Penalty, and in some cases, have also been prosecuted.  Some U.S. Taxpayers, who Opted Out of the OVDP, have been successful in reducing or totally avoiding any FBAR Penalty. However, many others have been less fortunate and consequently subject to the Willful FBAR Penalty in amounts far in excess of the Miscellaneous Offshore Penalty they would have paid had they remained in the OVDP.

The offshore tax evasion playbook, which has been around for quite some time with some slight variations, is still in use. Some of the practices include, but are not limited to, forming an offshore nominee entity in a blacklisted or designated tax haven jurisdiction and opening an FFA in the name of the nominee, Shell Company or other entity to obscure the identity of the true account owner. In many cases, the true account owner will secretly retain beneficial ownership in the FFA or asset as a means of retaining control and dominion over the account proceeds.

A savvy tax cheat will on occasion will have the mail related to the offshore account or asset held at the Foreign Financial Institution. The true account owner will then periodically travel to the foreign country to retrieve the mail in person or make arrangements for someone else to. Alternatively, the account owner will meet with a representative from the Foreign Financial Institution in the U.S. for the handoff.

For their part, Foreign Financial Institutions (“FFI’s”), Wealth Management Firms and other foreign counterparts have historically accommodated, promoted, and actively facilitated the secreting of offshore assets and income by U.S. taxpayers in exchange for receiving substantial bank, legal and advisory fees. Foreign governments have also been complicit by either turning a blind eye to these illicit practices or by relying on bank secrecy laws.  That has all changed thanks to U.S. global enforcement initiatives, international cooperation and the recent 80 billion dollars received by the IRS.

ENFORCEMENT HISTORY AND DEVELOPMENT

The catalyst for change started in 2008 when the DOJ prosecuted Swiss UBS, as well as a number of its advisors, attorneys and financial professionals for assisting U.S. taxpayers in hiding foreign assets and income from the IRS.  To avoid prosecution, UBS and the U.S. Government entered into a deferred prosecution agreement (DPA’s) wherein UBS was, among other things, required  to pay stiff penalties and admit that it’s cross border banking practices made use of Swiss privacy laws to aid and assist U.S. Taxpayers in committing offshore tax evasion.  As part of the deal, UBS also agreed to take affirmative steps to improve transparency and to provide the U.S. Government with information on its U.S. account holders.

Since the UBS case and the DOJ’s establishment of the Swiss Bank Program, many FFI’s have been subject to prosecution and have entered into either DPA’s or a non-prosecution agreements (“NPA’s”). These institutions have also been required to pay large penalties, agree to compliance reforms and have had to provide information on their U.S. account holders. Even small FFI’s that rely on correspondent banks to process financial transactions have not escaped DOJ scrutiny. They too have had to tow the line.

While the U.S. assault on international banking practices and U.S. account holders over the past fifteen years has motivated some U.S. customers to come out of the dark and disclose their foreign assets and income, many taxpayers persist in holding out and are actively engaged in unlawful practices, designed to avoid detection by the IRS.

Many U.S.  account holders have scrambled to close existing accounts at one FFI and transferring the proceeds or assets to another.  In some instances the move entails transferring an existing account in one country to an FFI in another. Still others have elected to form multiple entities as means of making detection more difficult.

United States of America v. Mark Anthony Gyetvay

The IRS resolve in making offshore tax evasion a top priority is evidenced by the sentence handed down by Judge Joan Ericksen of the United States District Court for the Middle District of Florida against Gyetvay as well as by the commencement of Willful FBAR Penalty collection suit.

The facts related to the conviction and sentencing of Gyetvay and the FBAR Penalty collection suit are worthy of mention given the level of premeditation and amount of time and effort expended by the defendant in carrying out his nefarious plan.  The dire consequences Gyetvay now faces should serve as an ominous warning to those who not know when to stop digging.

The defendant, Mark Anthony Gyetvay (“Gyetvay,” “defendant” or “taxpayer”) is a birthright citizen of the United States and also a citizen of Russia and Italy. From the court records, the defendant is well educated having earned various degrees including an accounting degree from Arizona State University and a graduate degree in Strategic Management from Pace University.  Gyetvay is also a Certified Public Accountant, licensed in the State of Colorado.

The court records also reveal an impressive work history on the part of the taxpayer.  The defendant worked for PriceWaterhouse Coopers, a Big Four public accounting firm, until 1995 when Gyetvay became a partner.

In 2003 the defendant left public accounting and became the CFO of Novatek, a Russian independent gas producer. In 2005 the Taxpayer was successful in navigating Novatek through an initial public offering on the London Stock Exchange. In recognition of his services Gyetvay was promised and eventually received a significant block of Novatek Shares.

In October of 2005 the taxpayer formed Opotiki Marketing (“Opotiki), a nominee entity organized under the laws of Belize. He thereafter opened an Account (“Opotiki Account”) at Coutts & Company, LTD (“Coutts”), a Swiss Private Baking and Wealth Management Firm located in Zurich, naming Opotiki as the record owner of the account, but naming himself as the beneficial owner of the account.

To prevent the IRS from discovering the existence of the Opotiki Account, the defendant also requested that Coutts hold all mail related to the Opotiki Account at the Firm’s “Hold Mail” counter. The hold mail tactic was very common prior to DOJ’s crackdown on the international banking industry. At this time, the maximum assets under management in the Opotiki Account were $12, 650, 792.

The taxpayer was so impressed with himself that in 2007 he decided to form Felicis Commercial Corp (“Felicis”), a British Virgin Island nominee entity. Thereafter, Gyetvay opened a separate account with Coutts (the “Felicis Account”), naming Felicis as the account holder and designating himself as the sole beneficiary of the Felicis Account. At this time Felicis had over $53 million dollars’ worth of assets under management.

The defendant failed to file U.S. Income Tax Returns, failed to file FBARS and took further steps to frustrate the U.S. Government, including removing himself as the beneficial owner of the FFI’s and making his wife, a Russian Citizen, the beneficial owner of the accounts. He also used his wife’s Moscow address as her residence, despite the fact that both Gyetvay and his wife resided in Naples Florida.

In response to pressure from the U.S. Government and in light of the UBS prosecutions and the Swiss Bank Program, Coutts instituted compliance procedures which included bringing in outside U.S. attorneys and accountants to review whether the U.S. account holders were in compliance with U.S. Tax and financial reporting laws. As part of its compliance procedures, Coutts also required its U.S. clients to sign a declaration permitting the disclosure of their account to the IRS.

 

Sensing that the posse was on his trail, Gyetvay closed the Opotiki and Felicis Accounts at Coutts and transferred the assets to the newly created accounts at Hyposwiss (the “Hyposwiss Accounts”), listing defendant’s wife as the beneficial owner and using a Moscow address as Ms. Gyetvay’s principal residence. In 2013 Falcon Private Bank acquired the assets of Hyposwiss.

Gyetvay did not retain an accountant to prepare his tax returns for 2006 through 2008 until July of 2010, when Ms. Gavrilova decided to pursue becoming a Permanent Lawful Resident of the United States. That decision required the defendant to explain to immigration authorities why he failed to file tax returns for the 2006 through 2008.  Consequently, the defendant retained an Atlanta-based accounting firm (the “Atlanta Firm”).

As part of the information gathering and due diligence processes, the Atlanta Firm sent Gyetvay a tax organizer for each year. The defendant completed and returned the organizer to the Atlanta Firm. Gyetvay also provided the accountants with information on his income and foreign bank accounts. The defendant falsely represented to the Atlanta Firm that he had no foreign financial accounts during the 2006-2008 tax years. He also deliberately underreported his earnings to the Atlanta Firm.

Based upon the responses and information provided by Gyetvay, the Atlanta Firm did not prepare FBARs on behalf of the defendant and also underreported defendant’s income for 2006 through 2008 for U.S. tax purposes.

In addition to filing false tax returns for the tax years 2006 through 2008, Gyetvay rejected the Atlanta Firm’s advice that Gyetvay file FBARs for the 2006 through 2008 tax years and that he completely disclose all of his FFA’s.

For the tax years 2009-2015 Gyetvay received significant amounts of income in the form of wages, dividends and interest income from his FFA’s. Once again, the defendant failed to file timely tax returns, failed to timely pay to the taxes due and owing to the IRS and failed to file FBARS.

In 2015 Falcon announced that it had entered into a Non-Prosecution Agreement with the DOJ under the Swiss Bank Program.  Sensing the need to make some form of offshore disclosure, the defendant decided to utilize the Streamlined Foreign Offshore Procedures rather than participate in the OVDP.

The Streamlined Foreign Offshore Procedures is only available to taxpayers who meet the non-residency requirement that in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed: (1) the individual did not have a U.S. abode and (2) the individual was physically outside the United States for at least 330 full days.

Both the Foreign and Domestic Streamlined Procedures require that the taxpayer submit original or amended returns for the previous three years and FBARS for the previous six, along with a Statement of Facts, which is attached to either Form 14653 or 14654, certifying that the compliance failure was the by-product of non-willful disregard. Forms 14653 and 14654 as well as the accompanying Statement of Facts, both must be signed under penalties of perjury.

The Streamlined Domestic procedures require a miscellaneous offshore penalty of 5% of the offshore assets, while the Streamlined Foreign procedures carry no penalty. There is no mystery as to why Gyetvay utilized the Streamlined Foreign procedures.

Seeking to avoid any penalty, on July 13, 2015 Gyetvay signed  Form 14653, (Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures) covering the tax years 2011-2013. In the certification, the defendant falsely claimed that he worked and resided in Russia from 1995. He also falsely claimed that while abroad, he made annual tax payments to the IRS and tried to file his U.S. Tax Returns.

The defendant’s excuse for non-compliance was that Gyetvay, a CPA, was unable to file his returns due the complexity of the U.S. tax laws and his inability to find capable U.S. tax preparers in Russia. Based upon his explanation, the taxpayer maintained that his actions were not willful.   The foregoing statements were made despite the fact that defendant and his wife owned a residence and lived, in Naples, Florida during the time period at issue.

Gyetvay also signed under the penalties of perjury, Form I-684, Affidavit of Support under Section 213A of the Immigration and Nationality Act in connection with sponsoring his wife for Permanent Resident status in the United States. In his Affidavit the defendant stated that his mailing address and place of residence was in Naples, Florida.  In addition, the defendant also represented that he was registered as a Florida voter and that he held a Florida driver license.

In connection with his Streamlined Foreign filings, Gyetvay paid taxes, interest, and penalties in the amount of $4,649,609.77 for unfiled 2011 through 2013 tax returns, but paid no FBAR penalty since he claimed overseas residence.

Despite having an interest in foreign bank accounts since at least 2001 and despite being advised by the Atlanta Firm that he should file FBARs, Gyetvay did not file an FBAR until he made his false disclosures in his Streamlined Foreign submission.

As part of his Streamlined Foreign filings, the defendant filed FBARs for calendar years 2008 through 2013, where Gyetvay disclosed his accounts at Coutts (Switzerland), Citibank (Russia), First United Bank (Russia), Hyposwiss (Switzerland), and Falcon (Switzerland). However, the disclosures were incomplete. The defendant also failed to properly report the account number and account value of certain FFA’s.

Defendant timely filed his FBAR for 2014, but once again, his FBAR filing contained deliberate misrepresentations.  Gyetvay falsely reported that he had signatory authority, but no financial interest, in a Falcon Account ending in 3116. In this regard, the defendant also failed to report the highest balance of the Falcon 3116 Account, despite having reported the highest balance in his 2013 FBAR filing.

In addition Gyetvay failed to report his interest in a Falcon Account with account number ending in 4056, despite having included the account in his 2013 FBAR filing. The glaring omissions resulted in defendant having to file an amended FBAR for 2014.

As a consequence of the defendant’s systematic and deliberate attempts to defraud the U.S. Government, the jury trial found Gyetvay guilty of the following:

  1. willfully failing to timely file a 2013 and 2014 federal income tax returns, in violation of  26 U.S.C. § 7203;
  2. willfully making a false statement in Gyetvay’s Streamline Submission that his failure to report all income, pay all tax, and submit all required information returns, including FBARs, was “not due to any willfulness” in violation of 18 U.S.C. § 1001 and 18 U.S.C. 1002; and
  3. willfully failing to file an accurate FBAR for 2014, in violation of 31 U.S.C. § 5314; 31 U.S.C. 5322(a); 31 C.F.R. § 1010.350, 31 C.F.R. § 1010.306(c)-(d), and 31 C.F.R. § 1010.840(b).

In addition, the United States filed a FBAR collection suit against Gyetvay. The U.S. Government alleges that defendant owes close to 44 million dollars in Willful FBAR Penalties for 2014, together with accrued interest and failure to pay penalties under 31 U.S.C. § 3717, and fees.

The Gyetvay conviction as well as the FBAR Willful Penalty suit underscores the seriousness associated with taking steps to hide your foreign assets and income from the IRS.  Waiting to see if the U.S. Government is coming after you is no plan at all. For those who think they can continue to avoid detection, I urge you to listen to the Ojay’s “For the Love of Money.”

 

 

The assessment of the § 6672 penalty can be devastating, and in some cases, life changing. Individuals who are subject to the penalty usually state that they were unaware that failure to collect and pay employment taxes to the IRS could result in personal liability for unpaid payroll taxes, and in certain cases, criminal prosecution. The recent increase in the number of employment tax examinations and criminal prosecutions is alarming and certainly underscores the Government’s commitment to making employment tax fraud a priority.

The § 6672  penalty, commonly known as the “Trust Fund Recovery Penalty” (“TFRP”) imposes personal liability on individuals who are required to collect,  account for, and pay over employment taxes and who willfully fail to collect such tax, or truthfully account for and pay over such tax. The requirements for imposition of the penalty are: (1) the penalized person is deemed to be a “responsible person” or someone responsible for having collected and paid the tax in the first place; and (2) the penalized person must have willfully failed to collect and pay that tax. Godfrey v. United States, 748 F.2d 1568, 1574 (Fed. Cir. 1984).  The TFRP provides the IRS with an alternate means of collecting unpaid employment taxes, when the employer is unable to do so, by permitting the IRS to pierce the corporate veil and hold those responsible for the employer’s failure to pay the outstanding taxes. White v. United States, 372 F.2d 513, 516, 178 Ct.Cl. 765 (1967).

The TFRP usually comes into play when a business is experiencing a financial crisis and the owner elects to use the available funds to pay other creditors, such as a bank or a supplier. In more egregious cases the responsible person may use the trust funds for personal expenses or to support an extravagant lifestyle.

Employers are required to withhold income and FICA taxes from employee salaries and must also contribute the employer’s share of FICA taxes. The withheld funds are to be placed in trust with the government designated as the beneficiary.

The IRS commitment to pursue those who have failed to account and deposit payroll taxes on behalf of their employees is underscored by the remarks made by the Assistant Attorney General at a Federal Bar Association Conference:

“Since January 2015, the Tax Division has sharpened its focus on civil and criminal employment tax enforcement.  As most of you know, these cases involve employers who fail to collect, account for, and deposit tax withheld from employee wages.  These withholdings represent 70 percent of all revenue collected by the IRS, and as of September 2015, more than $59 billion of tax reported on Forms 941 remained unpaid.  These employers are literally stealing money, knowing that their employees will receive full credit for those amounts when they file their returns.  The employers gain an unfair advantage over their competitors and the U.S. Treasury is left holding the bag.” Acting Assistant Attorney General Remarks at Federal Bar Association Tax Law Conference (March 4, 2016).

26 U.S.C § 6672 (a) provides in part:

“Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

The assessment of the TRFP requires that the IRS establish that the person against whom enforcement is sought had a duty to collect, account and pay over employment taxes.

The term “person” is defined in 26 U.S.C. § 6671(b) and includes:

“an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.”

The courts use the term “person” and “responsible person” interchangeably. While the term “person” is statutorily defined, the latter is not. Rather, the term “responsible person” is a creation of the courts. Slodov v United States, 436 U.S. 238 – Supreme Court 1978.  In order to be considered a responsible person, the taxpayer must be “under a duty” to collect, truthfully account for, and pay over” any taxes. The inquiry will always focus on whether the person has “significant control over the enterprise’s finances.” Fiataruolo v. United States, 8 F.3d 930, 939 (2d Cir. 1993) (quoting Hochstein v. United States, 900 F.2d 543, 547 (2d Cir. 1990)).

While many of the cases involve officers, directors and shareholders, the courts have expanded who qualifies as a responsible person to include creditors, employees, accountants and attorneys.  If the responsible person could have impeded the cash flow of the business to prevent the trust funds from being squandered, then he or she will be held liable Thomas v. United States, 41 F.3d 1109, 1113 (7th Cir. 1994). Furthermore, the TFRP can be assessed against more than one person. Thibodeau v. United States 828 F.2d 1499, 1503 (11th Cir. 1987). Consequently, each person found liable can be held responsible for the full amount of unpaid trust fund taxes.

The IRS considers the following factors when making a determination of whether a person is a responsible person:

  1. Does the person(s) have a duty to perform?
  2. Does the person(s) have the power to direct the act of collecting trust fund taxes?
  3. Does the person(s) have the accountability for and authority to pay trust fund taxes?
  4. Does the person(s) have the authority to determine which creditors will or will not be paid?
  5. Does the person(s) have the status, duty and authority to ensure that the trust fund taxes are paid?
  6. Is the person(s) an officer, director, or shareholder of the corporation?
  7. If the person(s) is an officer, what do the corporate by-laws state regarding the person(s) responsibilities as it relates to financial matters?
  8. Does the person(s) have the ability to sign checks?
  9. Does the person have the authority to hire and fire employees?
  10. Does the person have the authority to sign and file the excise tax or employment tax returns, such as Form 941, Employer’s Quarterly Federal Tax Return?
  11. Does the person control payroll/disbursements?
  12. Does the person control the corporation’s voting stock? and
  13. Does the person(s) make federal tax deposits?

While no one factor is dispositive, check-signing authority is considered strong indicia of responsibility, even in cases where the check signer is instructed by a superior not to pay the taxes.  Howard v. United States, 711 F.2d 729, 734 (5th Cir. 1983). The facts in each case are evaluated by the IRS when making a determination as to responsibility. As the Court of Appeals pointed out in Godfrey:

“. . . the case law makes abundantly clear, a person’s “duty” under § 6672 must be viewed in light of his power to compel or prohibit the allocation of corporate funds. It is a test of substance, not form.” Godfrey 748 F.2d at 1576.

In addition to establishing that the individual is a “responsible person”, it is necessary that the Government prove that the person acted willfully.  The Internal Revenue Manual defines “willfulness” in the context of the TRFP as:

“intentional, deliberate, voluntary, and knowing, as distinguished from accidental. Willfulness is the attitude of a responsible person who with free will or choice either intentionally disregards the law or is plainly indifferent to its requirements.” I.R.M. § 8.25.1.3.2

Some of the factors the I.R.S will consider in making a determination of whether a responsible person was willful include:

  • Whether the responsible person had knowledge of a pattern of noncompliance at the time the delinquencies were accruing;
  • Whether the responsible person had received prior IRS notices indicating that employment tax returns have not been filed, or are inaccurate, or that employment taxes have not been paid;
  • The actions the responsible party has taken to ensure its Federal employment tax obligations have been met after becoming aware of the tax delinquencies; and
  • Whether fraud or deception was used to conceal the nonpayment of tax from detection by the responsible person. Id.

The courts have construed “willfulness” under § 6672 to mean the “voluntary, conscious and intentional act” of paying creditors other than the IRS when the company is financially troubled. Phillips v. IRS, 73 F.3d 939, 942 (9th Cir. 1996) (quoting Davis v. United States, 961 F.2d  867, 871 (9th Cir. 1992); Klotz v. United States, 602 F.2d 920, 923 (9th Cir. 1979)).

While evidence of willfulness requires proof of a voluntary, intentional, and conscious decision not to collect and remit taxes thought to be owing, it does not require proof of a special intent to defraud or deprive the Government of monies withheld on its account. Godfrey 748 F.2d at 1576, citing Scott v. United States, 354 F.2d at 295. The Court of Claims has consistently rejected the view that “a finding of willfulness entails a showing of evil motive, bad purpose, or calculated malevolence.” Id. at 1576. The focus of inquiry is rather “on the deliberate nature of the individual’s election not to pay over the money and the circumstances of that refusal.” Id. at 1576.  Consequently, if a person deemed a responsible party discovers that there are unpaid taxes, the responsible person has an immediate duty to use all unencumbered funds to pay taxes. United States v. Kim, 111 F.3d 1351, 1357 (7th Cir. 1997). Failure to pay the back taxes will result in personal liability on the part of the responsible person.

The Court of Appeals in Godfrey echoed the White definition of willfulness as meaning “a deliberate choice voluntarily, consciously, and intentionally made to pay other creditors instead of paying the Government.” Godfrey 748 F.2d at 1577, citing Scott 372 F.2d at 521. The Court of Appeals citing Feist v. United States, 607 F.2d at 961 also noted that willful conduct may also include a reckless disregard of an “obvious and known risk” that taxes might not be remitted. Finally, the Godfrey Court citing Bauer v. United States, 543 F.2d at 150; stated: “Mere negligence in failing to ascertain facts regarding a tax delinquency,” however, “is insufficient to constitute willfulness under the code.” Godfrey 748 F.2d at 1577.

When an employer falls behind on the payment of its payroll taxes, the IRS will send out a Federal Deposit Tax Alert Notice to the business.  If unanswered a Revenue Officer (“RO”) is assigned to the business to investigate the reason the business in non-compliant. The RO will attempt to bring the business into compliance by directing the business to set up a special trust account for the deposit of employment taxes. If the business fails to come into compliance, the next step will be to conduct an investigation of potentially responsible individuals against whom the § 6672 penalty can be assessed. The RO will then attempt to secure the business’s bank records and other records of the business. The RO will also issue Letter 3586 to the potentially responsible individuals setting a meeting (“Interview”). Letter 3586 is accompanied by Notice 784 “Could You Be Personally Liable for Certain Unpaid Federal Taxes.”

Following the Interview, the RO will determine whether to proceed with the proposed assessment. If the RO decides to move forward, he or she will generate and send the responsible person a 60 day Preliminary Notice styled as “Letter 1153” together with Form 2751 (“Proposed Assessment of Trust Fund Penalty”)   Thereafter, the IRS must wait 60 days after the issuance of Letter 1153 and the Proposed Assessment before issuing a notice and demand for payment. The responsible party has 60 days to respond and 75 days if the letter is addressed out of the country.

Most individuals are ill equipped to handle an IRS Interview and may unwittingly say something that will be used to establish responsible party status. In some cases, an individual’s statements may serve as a basis for a referral to the Criminal Investigation.  The RO will use Form 4180 (“Report of Interview with Individuals Relative to Trust Fund Recovery Penalty”) when conducting TFRP Interview.

Prosecutors will typically look to see whether an IRS Form 2751 or Form 4180 was completed during the civil administrative part of the case, because these documents may contain relevant admissions or statements by the defendant. See Moore v. United States, 648 F.3d 634, 636 (8th Cir. 2011) (approved admission of Form 2751 in § 6672 case); United States v. Thayer, 201 F.3d 214 (3d Cir. 1999) (in § 7202 case, the court noted that the defendant signed a Form 2751, “accepting personal responsibility for

unpaid tax liability and civil penalties”); United States v. Korn, 2013 WL 2898056 (W.D.N.Y. 2013) (in § 7202 case, Magistrate Judge noted that the Revenue Agent’s interview of the defendant was memorialized on a Form 4180).

Internal Revenue Code 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 § 7202, as well as 26 U.S.C. § 7201 (tax evasion), 26 U.S.C. § 7206(1) (false returns), 26 U.S.C. § 7212(a) (obstruction), and 18 U.S.C. § 371 (conspiracy to defraud).

To establish a violation of § 7202, the prosecutor must prove the following elements beyond a reasonable doubt:

(1) Duty to collect, account for, and pay over a tax;

(2) Failure to collect, truthfully account for, or pay over the tax; and

(3) Willfulness.

The element of willfulness under § 7202 is the same as other criminal offenses under Title 26.  In this context, the Government must show that a defendant voluntarily and intentionally violated a known legal duty. Cheek v. United States, 498 U.S. 192, 200 (1991); United States v. Pomponio, 429 U.S. 10, 12 (1976); United States v. Bishop, 412 U.S. 346, 360 (1973). Evil motive or bad purpose is not necessary to establish willfulness under the criminal tax statutes. Pomponio, 429 U.S. at 12.

Thus, Courts have rejected the defense that the trust funds were used tax to pay current expenses so the   company could stay afloat and eventually pay the delinquent tax in the future. Although such facts may have emotional appeal and may have an impact in sentencing, if the government proves the defendant voluntarily and intentionally used unencumbered funds to pay creditors other than the United States, the jury may nevertheless find the defendant guilty even if the intentional non-payment of the known trust fund tax liability was motivated by a desire to keep the business afloat. Cf., Collins v. United States, 848 F.2d 740, 741–42 (6th Cir. 1988) (in a § 6672 case, the court held that “[i]t is no excuse that, as a matter of sound business judgment, the money was paid to suppliers and for wages in order to keep the corporation operating as a going concern—the government cannot be made an unwilling partner in a floundering business Criminal Tax Manual 13-14.

The following represents a sample of 2023 prosecutions evidencing that Employment Tax Fraud is a top priority for the Government:

  1. On September 1, 2023 a Kansas woman pleaded guilty to willfully failing to account for and pay over employment taxes to the IRS. According to court documents and statements made in court, Sheryl Clanton owned and operated a Construction Company (“Company # 1”), a business specializing in the construction and maintenance of underground infrastructure. The defendant was President of the Company from 2006 through 2011, responsible for filing quarterly employment tax returns and collecting and paying federal income and Social Security and Medicare taxes withheld from employees’ wages to the IRS. For the first quarter of 2010 through the last quarter of 2011, the defendant did not pay approximately $980,536 in employment taxes owed to the IRS. In 2011, the defendant abandoned the Company #1 due to its outstanding tax obligations and a bank mortgage foreclosure, and started a second Construction Company (“Company #2”). From the second quarter of 2012 through the fourth quarter of 2017, the defendant did not pay approximately $1.1 million in employment taxes or file quarterly payroll tax returns as required by law.  The defendant also operated a third underground construction business (“Company # 3”), organized in late 2011. Between 2012 and 2015, the defendants did not report or       pay nearly $100,000 of employment taxes owed to the IRS on behalf of Company # 3. In    total, the defendant caused a tax loss to the IRS exceeding $2.2 million.
  1. On or about August 10, 2023, an Oklahoma man and a Virginia man pleaded guilty, in separate cases, to willfully failing to pay over employment taxes. According to court documents and statements made in court, Stephen Christopher Parker of Oologah, Oklahoma, and Michael Baines of Portsmouth, Virginia, were co-owners of a mental health counseling services company, Family Youth Intervention Services Inc., located in Tulsa, Oklahoma. In that role, the two men were responsible for withholding, accounting for and paying over the income and Social Security and Medicare taxes withheld from the wages paid to the company’s employees. For the second quarter of 2016 they did not file the required quarterly employment tax return or pay over the entirety of those taxes. The two defendants admitted that from January 2014 through December 2017, they did not pay over a total of approximately $1,265,259 in withholdings to the IRS.
  1. On July 6, 2023 a Colorado man was sentenced to 15 months in prison for evading the payment of more than $700,000 in employment taxes he owed to the IRS. The defendant co-owned restaurants and an oil production business, which had employees from whose paychecks he withheld income and Social Security and Medicare taxes. Starting in 2002 and continuing for many years, defendant failed to pay over the withheld payroll taxes to the IRS, and further, failed to file the required quarterly employment tax returns for his businesses. After failing to collect from the businesses, the IRS assessed the tax against the defendant personally (26 U.S.C. 6672 “Trust Fund Penalty”).   To prevent the IRS from collecting through bank levies the taxes he owed, the defendant  kept   the balances of his personal and business bank accounts low, often leaving them enough funds to cover expenses and then moved any remaining money to a bank   account not subject to   IRS levy. In total, the defendant  caused a tax loss of   approximately $737,128.
  1. On June 22, 2023 a Maryland restaurant owner pleaded guilty to willful failure to account for and pay over employment taxes and to filing a false personal tax return. According to court documents and statements made in court, the defendant owned and operated Maryland restaurant since 1995. As part of managing the restaurant, defendant issued Forms W-2 to his employees and withheld federal income and Social Security and Medicare (FICA) taxes from their wages. However, from 2010 through 2021, the defendant failed to file with the IRS the required Employer’s Quarterly Federal Tax Returns (Forms 941) reporting these employment taxes and did not pay the withholdings over to the IRS. In total, the defendant did not report or pay approximately $2,813,348.94 in employment taxes due and owing to the IRS. Instead of meeting his tax obligations, the defendant used funds from his business to pay other creditors and for a variety of personal expenses, including golf club membership dues, season tickets to the Baltimore Orioles, international vacations, and salaries for himself and his wife.
  1. On June 20, 2023 a Minnesota man who owned an automobile transmission business pleaded guilty to willfully failing to account for and pay over employment taxes. According to court documents and statements made in court, the defendant, Timothy J. Lundquist, owned and an automobile transmission remanufacturing company based located in Jordan, Minnesota. The defendant was responsible for filing quarterly employment tax returns and collecting and paying over to the IRS payroll taxes withheld from employees’ wages. For at least the last quarter of 2013 through 2018, the defendant did not pay withholdings to the IRS or file required employment tax returns. In total, he caused a tax loss to the IRS of over $1.2 million.
  1. On June 13, 2023 the Chief Financial Officer (CFO) of a Mississippi company pleaded guilty to willfully failing to report and pay over employment taxes withheld from employees’ paychecks. According to court documents and statements made in court, the defendant was the CFO of Construction Company engaged in the business of pipeline-maintenance and construction.  From at least 2012 through October 2018, the defendant, Julian Russ, did not file required quarterly employment tax returns or pay over the taxes withheld from employees’ wages to the IRS, despite knowing of his obligation to do so. In total, the defendant caused a tax loss to the IRS of more than $6 million.  Russ faces a maximum penalty of five years in prison. He also faces a period of supervised release, restitution, and monetary penalties.
  1. On June 2, 2023 a Florida man was sentenced to two years and eight months in prison for conspiring to defraud the United States and conspiring to harbor aliens and induce them to remain in the United States. According to court documents and statements made in court, between November 2010 and October 2020, defendant owned and operated several Key West labor staffing companies that facilitated the employment of non-resident aliens in hotels, bars, and restaurants operating in Key West and elsewhere who were not authorized to work in the United States. The Defendant encouraged workers to enter the United States illegally and induced them to remain in the country, in violation of immigration laws. The Defendant’s labor staffing companies paid alien workers without withholding federal income and employment taxes from their wages and did not report said wages to the IRS.
  1. On May 24, 2023 a California man was sentenced to 12 months in prison for willfully failing to account for and pay over employment taxes. According to court documents and statements made in court, Larry Kudsk operated two construction businesses in California these companies served as general contractors or subcontractors, including on some government projects. The defendant was responsible for filing quarterly employment tax returns and collecting and paying over to the IRS payroll taxes withheld from employees’ wages for both companies. The defendant did not timely file employment tax returns or pay over withholdings to the IRS, resulting in a tax loss exceeding $250,000.
  1. On April 14, 2023 an Iowa man was sentenced to two years in prison for evading payment of employment taxes owed by his company. According to court documents and statements made in court, the defendant, Kevin Alexander, owned a landscaping and construction company. Defendant was responsible for filing quarterly employment tax returns and collecting and paying to the IRS taxes withheld from employees’ wages. Between 2014 and 2017, the Company paid approximately $3.8 million in wages to its employees, of which approximately $1 million in income and Social Security and Medicare taxes was withheld. The defendant did not pay those withholdings over to the IRS. When the IRS attempted to collect unpaid employment taxes, the defendant sought to conceal his income by submitting a form to the IRS concealing the full amount of K&L’s available assets.
  1. On March 15, 2023 a Michigan business owner was sentenced to 12 months and one day in prison for failing to collect and pay over to the IRS employment taxes withheld from his employees’ wages. According to court documents and statements made in court, the defendant, Yigal Ziv, owned and operated a software development firm based in Walled Lake, Michigan. The defendant was responsible for filing the Company’s quarterly employment tax returns and collecting and paying to the IRS payroll taxes withheld from employees’ wages. From the first quarter of 2014 through the first quarter of 2018, defendant 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.
  1. On March 13, 2023 a federal grand jury in Philadelphia returned an indictment charging a Pennsylvania man and woman with conspiring to defraud the IRS and other tax crimes, including failing to pay employment taxes to the IRS. According to the indictment from approximately October 2013 through December 2021, Theodore Shearba and Jennifer Cemini owned and operated a landscaping and excavation business and attempted to defraud the IRS by (1) not reporting the income they received from the business, (2) using business funds to pay for personal expenditures, (3) not paying employment taxes, including the income tax withheld from employees’ paychecks and Social Security and Medicare taxes and (4) changing business names and concealing business income to thwart IRS efforts to collect the unpaid employment taxes. If convicted, the Defendants each face a maximum penalty of five years in prison for the conspiracy count and each employment tax count.

The above illustration represent a small number of the total prosecutions in 2023, with many industries represented in the mix, including but not limited to construction, technology companies, restaurants, auto dealerships, long term care facilities, and  landscaping companies just to name a few.

If you are involved in a business that is delinquent on its payroll taxes, there is a high likelihood that you will be investigated by the IRS.  Those individuals responsible for management of the business are particularly vulnerable to the TFRP should the business ultimately fail to pay its employment taxes, and may in certain cases be subject to criminal prosecution.

 

When looking into the issue of responsibility, the IRS will most always pick the low hanging fruit.  Since the IRS considers failure to pay your employment taxes stealing, the necessity of legal representation cannot be understated. If the IRS is currently conducting an investigation into the employment taxes of your business or you are behind in your payroll taxes, it is important to be proactive particularly if there is a risk of a referral to Criminal Investigation of the IRS. As such, a potentially responsible person should never attend an Interview without the assistance and advice of counsel, since any statement you make may be considered an admission of guilt.

 

Many individuals I have counseled over the years simply waited too long. You cannot hide your head in the sand!

 

 

Prosecution for employment tax crimes in 2022, reflects an increase in investigations for employment tax violations by the Department of Justice, Tax Division and also provides some insight as to the Government’s intention to prioritize employment tax crimes. In this regard, you can expect an increase in the number of employment tax examinations and assessment of penalties under 26 U.S.C. §6672 (the “Trust Fund Recovery Penalty”) as well as an increase in criminal prosecutions under 26 U.S.C. § 7202.

In general, employment tax violations involve an employer’s obligation to (i)collect payroll taxes from its employees; (ii) file quarterly and annual payroll taxes and (iii) remit the taxes it collects from its employees together with the amounts due from the employer.

Depending upon the circumstances, the failure to comply with the Tax Laws pertaining the employment taxes can result in the assessment of the Trust Fund Recovery Penalty in cases where the employer is unable to satisfy the outstanding employment tax liability. In more egregious cases, criminal prosecution, imprisonment, orders of restitution and other monetary penalties may be imposed.

As the 2022 cases below illustrate, employment tax violations involve two scenarios: The first scenario pertains to civil liability and the assessment of the Trust Fund Recovery Penalty. Under this scenario, the employer files quarterly payroll tax returns, regularly withholds and collects payroll taxes on behalf of its employees and remits these funds to the Internal Revenue Service. In addition, the employer remits its share of employment taxes.

Using the Trust Fund concept, the employer as well as a responsible person is considered a fiduciary, and as such, is charged with the responsibility of segregating and safeguarding the employment taxes it withholds from its employees until such time that it remits those funds, together with the employer’s portion to the Internal Revenue Service.

In the civil context, problems arise when an employer experiences a downturn in business or is faced with an unforeseen and substantial expenditure. In this instance, the employer may decide to use the funds it has withheld from its employees for other business purposes including making payments to both secured and unsecured creditors, purchasing inventory or machinery as well as other legitimate business expenses, such as rent, utilities or business supplies.  The employer’s rationale for diverting the entrusted funds is that business will soon pick up or the events which caused the cash crisis have subsided. In this situation, the employer reasons that he will catch up and make the IRS whole.

However, this logic is flawed for the following reasons. An employer has an unconditional duty to (i) withhold, account for and collect employment taxes from its employees; (ii) segregate and safeguard the employment taxes it collects; and (iii) remit these taxes to the IRS in a timely fashion. Under no circumstance may the employer divert employment taxes withheld from its employees for any purpose, including the payment of legitimate business expenses.

In rare instances, the employer rebounds and is able to catch up with its employment tax obligations. However, in many cases, the employer continues the practice of using the employment taxes it collects from its employees for business purposes theorizing that the diversion of employment taxes represents a form of government loan.  In the event the employer is unable to satisfy the outstanding employment tax liability, the IRS will look to assess the Trust Fund Recovery Penalty against the responsible person equal to  100% of the employment taxes due, together with accrued interest.

To be clear. Any departure from the employer’s statutory obligations, is considered stealing by the IRS and the “responsible person” will be liable under Section 6672 for 100% of the employment taxes that should have been withheld and paid over to the Government, together with accrued interest.

The assessment of the Trust Fund Recovery Penalty is predicated upon two statutory components. First, the individual must be a “responsible person,” within the meaning of Section 6672 (a); and second, the person must have “willfully” failed to collect and remit the employment taxes due. Under IRC Section 6671(b) a responsible person includes any officer or employee of the corporation, or member or employee of a partnership, who has the duty to collect or pay employment tax.

The mere holding of a title is not controlling on the issue of a person’s liability. The determination of a person’s status is based on substantive evidence as to whether the person had the authority, duty, and status to control the Company’s financial affairs.

In order for liability to attach under Section 6672 a person must exercise significant control over the business financial operations and the ability to decide which creditors get paid. A significant factor the IRS considers is who signs the checks? The IRS also considers whether the person is an owner, officer or director of the Company, whether the person has the right to hire and fire employees, sign contracts or is otherwise active in the Company’s Day to day business. Other factors considered by the IRS is whether the person makes payroll deposits or is responsible for the disbursement of payroll.

To avoid assessment of the Trust Fund Recovery Penalty, the individual must demonstrate that he or she lacked the requisite financial control through such things as company business records, e-mails, court pleadings in litigation involving the business, and affidavits from third parties, combined with effective written and oral advocacy.

In order for liability to attach, it must also be established that the person acted “willfully” in failing to collect, account for, or pay the employment taxes. In the context of Section 6672 willfulness has been defined in Godfrey v U.S. 748 F2d 1568, 1575-76 (Fed Cir. 1984) as “voluntary, intentional and conscious decision to pay other creditors rather than remit the employment taxes to the IRS.”

The second scenario most often involves the diversion of employment taxes withheld for personal reasons including the payment of personal expenses, such as mortgage or car payments and often times include the purchase of luxury automobiles and jewelry as well as expensive dinners and exotic vacations. In cases where the IRS has assessed employment tax liability and related penalties, the individual may even form a new entity designating a nominee as the owner. This tactic is designed to frustrate IRS collection efforts. The pattern is repeated with the true owner failing to file payroll tax returns and pay over to the IRS, the employment taxes withheld from the employees of the new company.

In these instances, the responsible person charged with withholding and remitting the employment taxes may, in addition to or in lieu of the Trust Fund Recovery Penalty, be subject to criminal prosecution under 26 U.S.C. , titled” Willful Failure to Collect or Pay Over Tax.  Section 7202 provides:

“Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than five years, or both, together with cost of prosecution.”

Under of Section 7202, it is the person or persons with the responsibility to collect, account for, and pay over who will be liable when there is a willful failure to perform this duty. The term “person” is construed to mean and include an individual, a trust, estate, partnership, association, company or corporations 26 U.S.C. § 7701(a)(1). Section 7343 extends the definition of “person” to include an “officer, or employee of the corporation or a member or employee of a partnership, who as such officer, employee or member is under a duty to perform the act in respect of which the violation occurs.” For purposes of the Trust Fund Recovery Penalty, 26 U.S.C. § 6671(b) provides an identical definition of “person.”

“A responsible person is someone who has the status, duty and authority to avoid the employer’s default in collection or payment of the taxes.” Ferguson v. United States, 474 F.3d 1068, 1072 (8th Cir. 2007).  In addition, a person is responsible for collecting accounting for, and paying over trust fund taxes if he or she has the authority required to exercise significant control over the employer’s financial affairs, regardless of whether the individual exercised such control in fact United States v. Jones, 33 F. 3d 1137, 1139 (9th Cir. 1994).

In addition, to prosecution under Section 7202, a person who willfully fails to file a payroll tax return can be charged under 26 U.S.C. §7203, which is a misdemeanor.

While employment tax deficiencies have historically been the subject of civil enforcement, and the by product of civil examinations, there is an alarming trend where the IRS is using the civil examination as a pretext for referring cases to Criminal Investigation (“CI”) of the IRS with the ultimate goal of prosecuting the responsible person.

While the concept of “willfulness” under Sections 6672 and 7202 seem to be substantially similar, the Department of Justice is well aware of the interplay between the civil enforcement and criminal prosecution as evidenced in The Department of Justice, Tax Division, Criminal Tax Manual, Section 9, Page 9 which provides in pertinent part:

“Prosecutors should ascertain whether an IRS Form 2751 (“Proposed Assessment of Trust Fund Recovery Penalty”) or Form 4180 (“Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes) was completed during the civil administrative part of the case, and if so, whether these documents contain any relevant admissions or statement by the Defendant.”

In particular, if the individual agrees to furnish information for purposes of completing Section V entitled: “Knowledge/Willfulness of Form 4180, the responses to this Section may constitute an admission or statement by the defendants that will be used for criminal prosecution under Section 7202.

The difference between Section 6672 cases and Section 7202 criminal prosecutions relates to the burden of proof. An IRS assessment under Section 6672 is presumed to be correct, and the Taxpayer has the burden of proof of rebutting the presumption that the assessment is correct.  The standard for rebutting the presumption is a preponderance of evidence. By contrast, in a Section 7202 prosecution, the Government has the burden of proof to prove all elements of the crime beyond a reasonable doubt.

The elements that the prosecution must prove include: (i) a duty to collect, account for and pay over a tax; (ii) the failure to collect, truthfully account for, or pay over the tax; and (iii) willfulness.

According to a report issued by TIGTA in March of 2017 titled: “A More Focused Strategy is Needed to Effectively Address Egregious Employment Tax Crimes,” TIGTA concluded that: (i) employment tax non compliance is a serious crime; (ii) when employers fail to account for and deposit employment taxes, they are, in effect, stealing from the Government; and (iii) Section 7202 needs to be used more often in order to promote compliance.

The objectives outlined in the TIGTA report are realistic goals in light of the Inflation Reduction Act (“IRA”) and the additional funds the IRS anticipates receiving.  The funding under the IRA will be used to, among other things, aggressively pursue employment tax prosecutions.

The 2022 cases below have a common thread; In each case, the employer, through a responsible person, has diverted the employment taxes withheld from its employees and used the proceeds for both legitimate business expenses or to pay personal expenses or to support a responsible person’s lifestyle. While diverting employment taxes withheld for purposes of satisfying outstanding business debts or for other legitimate business purposes may seem less egregious than diverting trust funds for personal use, diverting employment taxes earmarked for the IRS is considered stealing in both cases and can serve as the basis for criminal prosecution.

The cases below represent a sampling, but not a complete inventory, of criminal prosecutions for the willful failure to pay over employment taxes for the Tax Year 2022:

  1. On December 12, 2022 a Maryland business man was sentenced by U.S. District Court Judge Richard D. Bennett to three years in prison for not paying more than $ 2 Million in payroll taxes to the IRS on behalf of its company employees. In addition, Jonas Purisch was ordered to serve three years of supervised release and ordered to pay approximately $3.4 Million in restitution to the United States.

 

According to court documents and oral testimony. Purisch operated two employee staffing companies, Titan Staffing Network, Inc. and Titan Services, LLC.  The two companies provided workers for third party manufacturing businesses in Maryland. Between March of 2018 a March of 2021, Purisch collected over $2 Million from the employer’s employees but failed to pay the withheld employment taxes over to the IRS.

 

  1. On November 29, 2022, a Michigan business owner pleaded guilty to the willful failure to collect and pay over employment taxes on behalf of his employees. Court documents reveal that Yigal Ziv (“Ziv”) or (the “Defendant”) owned and operated Multinational Technologies, Inc., a software developer located in Michigan (the “Company”). As the responsible person, Ziv was responsible for the Company’s quarterly employment tax returns and collecting and remitting the withheld taxes to the IRS. According to court records, the Defendant collected approximately $691,000 in employment taxes from the first quarter of 2014 through the first quarter of 2018, but failed to file employment tax returns and also failed to remit the employment taxes collected to the IRS.

To exacerbate matters, despite learning of the IRS criminal investigation in 2018, Ziv did not file payroll tax returns from the fourth quarter of 2019 through the fourth quarter of 2020 and further failed to pay over to the IRS approximately $199,000 in payroll taxes withheld.

Court records reveal that during the same period Ziv caused the Company to spend several hundred thousand dollars on personal expenses including mortgage payments, luxury auto lease payments and department store purchases.

Ziv is scheduled to be sentenced in February of 2023 and could face a maximum penalty of up to five years in prison, be subject to supervised release and ordered to pay restitution.

  1. On November 28, 2022 Ari Weingard (“Weingard”) or (the “Defendant”), a Miami business owner pleaded guilty to willfully failing to pay over employment taxes to the IRS. Based upon court documents, Weingard owned and operated two car rental companies, Rent Max Miami, Inc. and Rent Max North, Inc. As the sole owner and CEO for the two companies, the Defendant was responsible for filing payroll tax returns, and collecting, accounting for and paying over the payroll taxes defendant withheld from his employees to the IRS. It was further reported that between 2011 and 2016 that Weingard withheld from his employees, but did not pay over to the IRS approximately $850,000 in employment taxes owed to the IRS.  During this period the Defendant caused the two car rental companies to pay over to Weingard the sum of $50,000 in the form of a cashier’s check. In addition, the Defendant caused the rental companies to pay over to Weingard’s wife the sum of $45,000, also in the form of a cashier’s check and further directed the rental company to pay expenses relate to the Defendant’s 55-foot yacht. Weingard faces a prison sentence of up to five years, will be subject to supervised release and ordered to pay restitution and other penalties.

Sentencing has yet to be scheduled by U.S. District Judge K. Michael Moore.

  1. On November 22, 2022, Oleksandr Morgunov (“Morgunov”) or the (“Defendant”), a former resident of Key West pleaded guilty to immigration fraud as it related to the operation of several Key West labor staffing companies. According to court documents and other statements Morgunov assisted in operating Paradise Choice, LLC, Paradise Choice Cleanings, LLC, Tropical City Services, LLC and Tropical City Group, LLC, all of which operated in Southern Florida. The staffing companies facilitated the employment of individuals in hotels, bars and restaurants in Key West as well as other locations, despite the fact that the employees were not authorized to work in the United States.

In this regard, the companies withheld employment taxes from its employees, but failed to file employment tax returns and further failed to pay over employment taxes to the IRS.

The Defendant admitted that he and other co-conspirators defrauded the IRS out of more than $7.9 Million in employment taxes

Morgunov faces ten years in prison for conspiring to harbor aliens and to induce them induce them to remain in the United States. Sentencing is scheduled for January 31, 2023.

  1. On November 16, 2022, Kevin Alexander (“Alexander”) or (the “Defendant”), owner of a landscaping and construction firm pleaded guilty to tax evasion. According to court records,

Alexander owned K&L Construction. As the Company’s sole shareholder and president, the Defendant was responsible for filing quarterly employment tax returns and also responsible for collecting and paying over the employment taxes withheld from his employees.  The court records further reflect that from the second quarter of 2014 through the first quarter of 2017 the Company withheld approximately $1 Million in employment taxes, but failed to remit the withheld employment taxes to the IRS.

 

During the collection proceedings Alexander accepted responsibility for paying the Company’s outstanding tax balance. However, the Defendant submitted a false form to the IRS that concealed some of his assets. As part of his plea agreement, Alexander admitted that he submitted the false form for purposes of concealing assets and evading the payment of the Company’s outstanding payroll taxes.

 

Alexander could be sentenced to prison for up to five years. He may also face a period of supervised release and be ordered to pay restitution and monetary penalties. Sentencing is to be scheduled at a later date.

 

  1. On October 2022, a federal grand jury in New Jersey unsealed an indictment charging Zeki Donuk (“Donuk”) or (the “Defendant”) with tax evasion and employment tax crimes, filing false returns ad making statements in bankruptcy. All charges other than the employment crimes are enumerated here for purposes of context and are not part of this discussion. According to charging document, from the third quarter of 2016 through the third quarter of 2017, the Defendant did not collect or account for or pay over to the IRS employment taxes on behalf of two construction companies operated by Donuk. It is further alleged in the indictment that for those quarters the Defendant did not file quarterly payroll returns, despite his obligation to do so.

If convicted, Donuk faces up to five years in prison as well as supervised visitation, restitution, and monetary penalties.

  1. On September 21, 2022 a West Virginia Federal Grand Jury returned an indictment charging Christopher Smith (“Smith”) or (the “Defendant”) with the willful failure to pay over employment taxes. According to the indictment, Smith operated three companies, all of whom, provide ambulance services in West Virginia. The Defendant was responsible for collecting and paying over to the IRS employment taxes withheld from the three companies, but did not pay over the employment taxes withheld from the companies’ employees, nor did he pay the employer’s share of payroll taxes over to the IRS. After the IRS assessed the Section 6672 penalty against Smith, the Defendant stopped operating Stat Ambulance Service and created Stat EMS in the name of a nominee owner. The defendant continued to operate the new company and, likewise failed to pay over to the IRS, the employment taxes owed.

The indictment further alleges that after the IRS attempted to collect the unpaid employment taxes for Stat EMS as well as the resulting penalties, Smith attempted to obstruct the IRS collection efforts by making false and misleading statements. Specifically, it is alleged that Smith stated that he did not own Stat EMS and further that he did not have a personal bank account.

To further frustrate IRS collection efforts, the charging document alleges that Smith paid personal expenses from Stat EMS business bank account, transferred funds from Stat EMS to a bank account the defendant controlled, and diverted his own paychecks into a bank account in the name of another person.

If convicted, Smith faces up to five years in prison, may be subject to supervised release and ordered to pay restitution and monetary penalties. Trial has yet to be scheduled.

As the above cases illustrate there are serious consequences associated with failing to withhold, account for, collect and pay over employment taxes that are withheld from employees, ranging from the assessment of the Trust Fund Recovery Penalty against the responsible person to imprisonment for a period of up to five years, and an order to pay restitution and other monetary penalties. The outcome in each case will depend upon the facts developed in connection with Forms 2751 and 4180, and any statements made by the individual during the Form 4180 interview. The information provided by the individual for purposes of completing both Forms may constitute an admission that the individual is a responsible person and that the diversion of employment taxes withheld was willful.

Given the high stakes, it is well advised to seek the advice of an experienced Tax Attorney if you are behind on your payroll taxes, received a Notice of Examination or have been contacted by the IRS.

Since no two cases are alike, reviewing the specific facts in each case with a Tax Attorney is critical for purposes of completing Form 2751 and deciding whether to provide information for purpose of completing Form 4180 and attending the interview. Both Forms provide for the signature of the individual under penalties of perjury. Consequently, honest responses to the questions contained in either Form could constitute an admission of guilt on the part of the individual and serve as a basis for prosecution. Furthermore, if the Individual elects to attend the Form 4180 interview, any statement made during the interview can be used to establish criminal liability.

If you are contacted by the IRS or receive a Notice of an Employment Tax Examination with respect to unpaid employment taxes, do not call or communicate in any way with the agent.

There is a natural tendency on the part of Taxpayers to try and convince an agent that the individual is not a responsible party or that the failure to file payroll tax reports and the failure to collect, account for or remit the employment taxes to the IRS was not willful.

In this regard, Taxpayers who call the agent and try to plead their case often times make incriminating statements, particularly in cases where employment taxes withheld have been used to pay legitimate business expenses. For some reason, some Taxpayer believe that diverting withheld payroll taxes in order to pay business expenses or creditors is justified. Clearly, it is not.

In addition, if a Taxpayer revises or changes any prior statement in an attempt to rehabilitate his testimony he or she may suddenly find that he or she is also being charged for lying to the agent.

Instead of engaging the agent, simply tell the agent that you wish to hire an Attorney and will not make any statement or complete any form without first consulting with an Attorney. Furthermore, you should inform the agent that you have an absolute right to be represented under the Taxpayer’s Bill of Rights.

After retaining an Attorney, the legal representative will typically reach out to the agent and discuss the nature and scope of the examination. In some cases, an experienced Attorney may be able to negotiate a limitation on the scope of the exam or the number of years to be examined.

Prior to taking any action, the following decisions need to be made:

  1. Should the Taxpayer’s representative be present during the examination?
  2. Should the Representative meet alone with the agent for purposes of the examination?
  3. Where should the examination take place?
  4. Following the examination, the IRS may issue Letter 1153 and Form 2751. Should the Taxpayer provide information for purposes of completing Form 2751?
  5. Should the Taxpayer sign Form 2751? By signing Form 2751 an individual is admitting that he or she is a responsible person and that the failure to withhold, account for, collect and remit the employment taxes to the IRS was willful. This finding can subsequently be used in a criminal prosecution.
  6. Should the Taxpayer attend the Form 4180 interview? and if so, should the Taxpayer’s representative be present?
  7. Should the Taxpayer provide information for purposes of completing Form 4180?
  8. Should the Taxpayer sign Form 4180?

Based upon TIGTA’s findings and its recommendations, and in light of funding to be provided under the IRA, the IRS is poised to aggressively pursue the assessment of the Trust Fund Recover Penalty and/or criminal prosecution against those who fail collect, account for or pay their employment taxes.

Retaining a seasoned Tax Attorney can mean the difference between a civil penalty assessment and criminal prosecution.

Anthony N. Verni is a Tax Attorney and a Certified Public Account. Mr. Verni has represented dozens of taxpayers in employment tax cases. For a free consultation, please contact Anthony at (561) 531-8809.

The issue of whether the Government can repatriate a taxpayer’s foreign assets for purposes of satisfying a taxpayer’s outstanding FBAR penalty judgment has not been extensively reported on or discussed. However, the issue was recently addressed by the U.S. District Court for the Southern District of Florida in United States v. Schwarzbaum (S.D. Fla. Dkt # 18-CV-81147-BLOOM/Reinhart).  The decision signals the Biden Administration’s intent to become more aggressive in the collection of outstanding FBAR penalty judgments.

Taxpayers, who have offshore assets, but have yet to report them, should be concerned.  In particular, those who are contemplating expatriation or those who no longer reside in the United States may find themselves subject to FBAR penalties, extradition, criminal prosecution, and the imposition of additional civil fines. Likewise,  U.S. persons against whom FBAR penalties have been assessed, who continue to reside in the United States and who have parked their assets overseas as a means of preventing the Government from collecting need to rethink this strategy.

In Schwarzbaum, the Government commenced an FBAR collection suit against the taxpayer in August of 2018. At the conclusion of a five day bench trial in May of 2021, the Court entered an FBAR penalty judgment in favor of the Government in the amount of $12,555,813. The judgment was based upon Schwarzbaum’s willful failure to file FBARs in compliance with 31 U.S.C. § 5314.

The Government’s post judgment discovery revealed that the taxpayer lacked sufficient assets in the United States from which the outstanding judgment could be satisfied.  However, the discovery did make clear that the taxpayer had sufficient assets located in Switzerland from which the judgment could be satisfied.

Consequently, the Government filed a Motion with the Court for an Order directing Schwarzbaum to repatriate sufficient funds to the United States in order to satisfy the judgment, by depositing such amounts in the form of an appeal bond.

In its Motion, the Government maintained that authority for such an Order exists under, the Fair Debt Collection Procedures Act of 1990 (“FDCPA”), 28 U.S.C. § 3001 et seq.

Judge Bloom referred the Motion to a Magistrate for purposes of issuing a Report and Recommendations (“R&R”).  On June 30, 2021 the Magistrate issued his R&R, recommending that the Government’s Motion be granted. The taxpayer filed Objections to the R&R and the Government filed a Response to the Objections. On October 26, 2021, the Court, adopting the Magistrate’s R&R, entered an Order in favor of the Government.

Prior to the Courts October 26, 2021 Order, the Taxpayer filed an appeal to the U.S. District Court for the Eleventh Circuit.

The Magistrate’s R&R concluded that the Court has authority under the FDCPA by virtue of its express incorporation of the All Writs Act, 28 U.S.C. § 1651 to Order the Taxpayer to repatriate $18,227,465.89 in addition to any additional post judgment interest accrued since May 31, 2021.

The Court rejected the Schwarzbaum’s argument that the All Writs Act does not provide an independent collection remedy and that the FDCPA provides the sole remedy for collections.

The footnotes to the Order provide some context with respect to the taxpayer’s scheme. Specifically, Schwarzbaum took steps to render himself judgment proof in the U.S. including selling his home in Palm Beach County Florida, and moving from Florida to Switzerland, where he maintained three Swiss accounts totaling in excess of $49 million. The footnotes also reveal the taxpayer transferred the bulk of his liquid assets from the United States to Switzerland, prior to the Complaint being filed by the Government.

The Court adopted the R&R and held that the FDCPA incorporates the All Writs Act. Quoting from the language in 28 U.S.C. § 1651, the Court noted that that the “All Writs Act empower federal courts to ‘issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usage and principles of law.’ “

The Court further noted that the FDCPA provides for issuance of various writs including writs of execution and writs of garnishment. Judge Bloom, citing United States v. Ross, 302 F.2d 831, 834 (2d Cir. 1962) and United States v. McNulty, 446 F. Supp. 90, 90 (N.D. Cal. 1978), pointed out that the cases supporting the Courts interpretation of the interplay between the FDCPA and the All Writs Act rely upon the Court having personal jurisdiction over the defendant to reach assets overseas in cases where the defendant has an outstanding judgment or tax liability to the Government.

The takeaway from this Decision is that an individual who is subject to the assessment of FBAR penalties, and who has not otherwise challenged the assessment, can certainly expect the Government to file a collection action. Any attempt to place assets outside of the reach of the Government, by maintaining or otherwise transferring assets overseas, will be dealt with by the Government in short order. One can reasonably expect that the Government will utilize post judgment Orders of Repatriation to assist in the collection of an outstanding FBAR penalty judgment. The foregoing is true whether a taxpayer expatriates moves overseas or continues to reside in the U.S.

Some may be wondering why Scwarzbaum was not indicted and extradited. Although the U.S. has an extradition treaty with Switzerland, Switzerland does not typically honor such requests. Moreover, such an indictment may have been sealed.

It is noteworthy that the number of extraditions to the U.S. in tax and FBAR related cases is on the rise. Consequently, as the saying goes:  “No matter where you go, there you are.”

 

 

Why it’s a Very Bad Idea?

Tax fraudA taxpayer who owes or anticipates owing a substantial amount of income tax to the IRS may be tempted to transfer his or her property to a spouse, a relative or a nominee entity with the hope of preventing the IRS from collecting the outstanding tax debt. Similarly, a taxpayer may have an incentive to transfer property to a third party, in circumstances where the taxpayer may be subject to the 26 U.S.C. § 6672(Trust Fund Penalty). The taxpayer usually justifies such a transfer as “strategic planning.” Sometimes the taxpayer acts alone. In other instances, the taxpayer may be aided by a complicit, inexperienced or incompetent attorney.

These tactical maneuvers almost always fail and invariably result in the property transfer being judicially set aside, and/or the imposition of personal liability on the part of the transferee. In addition, the illicit transfer of property can result in significant civil and criminal penalties as well as criminal prosecution.

The discussion that follows examines the judicial remedies available to IRS including the commencement of a fraudulent conveyance action in either a state or federal court pursuant to state law or the Federal Debt Collections Practices Act (“FDCPA”). The discussion will also examine the imposition of transferee personal liability under 26U.S.C. § 6901.

Fraudulent conveyance

In general, a fraudulent conveyance represents a conveyance of property to a third party without consideration or for less than adequate consideration. Procedurally, the IRS has the burden of proving that either constructiveor actual fraudexists. Constructive fraudexists where a taxpayer’s property is transferred for less than its fair value and the taxpayer is insolvent at the time of the transfer or is rendered insolvent following the transfer. Actual fraudexists where a taxpayer transfers property to a third party with actual intent to hinder, delay, or defraud the IRS in the collection of the tax debt.

Constructive fraud

In the context of constructive fraud, the IRS must establish the following elements in order to set aside a transfer of property:

    1. That the alleged transferee received property of the transferor.
    2. That the transfer was made without consideration or for less than adequate consideration.
    3. That the transfer was made during or after the period for which the tax liability accrued.
    4. That the transferor was insolvent prior to or because of the transfer of property or that the transfer of property was one of a series of distribution of property that resulted in the insolvency of the transferor.
    5. That all reasonable efforts to collect from the transferor were made and further collection efforts would be futile.

The above elements suffice to establish constructive fraud and it is unnecessary for the IRS to prove actual intent to defraud.

Actual fraud

In order to establish actual fraud, the IRS must prove the taxpayer’s actual intent to hinder or delay or defraud the IRS. The FDCPA identifies eleven non-exclusive factors to be considered including:

    1. Whether the transfer was made to an insider.
    2. Whether the transfer represents substantially all of the taxpayer’s assets.
    3. Whether the value of consideration received by the taxpayer was reasonably equivalent.
    4. Whether the taxpayer was insolvent or became insolvent shortly after the transfer was made.
    5. Whether the transfer occurred shortly before or shortly after the tax debt was incurred.

In addition to commencing an action to set aside a fraudulent conveyance, IRC § 6901provides the IRS with a procedural mechanism for holding the transferee personally liable for the debt of the taxpayer. In contrast to an action to set aside a property transfer, Section 6901 is focused on the transferee rather than to the property. It is noteworthy that commencing an action to set aside a fraudulent transfer and imposing personal transferee liability under Section 6901 are not mutually exclusive remedies. The IRS may consider reliance on the FDCPA or a state’s fraudulent conveyance statute as the basis for imposing personal transferee liability and may also pursue multiple remedies.

Transferee liability

To establish personal transferee liability, the IRS has the burden of proving the existence and extent of the transferee’s liability. In addition, where the taxpayer unsuccessfully contests the liability in a judicial proceeding, the taxpayer as well as the transferee is estopped from contesting the liability either in a fraudulent conveyance action or for purposes of imposing personal transferee liability. The IRS has the burden of establishing the taxpayer’s tax liability and the amount. However, the transferee’s liability is capped at the value of the property transferred. The transferee seeking to avoid or mitigate transferee liability must prove the taxpayer’s liability is less than the amount asserted by the IRS.

A taxpayer, who is considering making a transfer of property to avoid his or her income tax obligations is creating a substantial risk that the transfer will be set aside and/or the transferee will be personally liable. Moreover, a taxpayer may soon find himself/ herself the subject of a criminal investigation. When considering such a decision, a taxpayer should always first consult with a knowledgeable and experienced tax attorney for a comprehensive review of all the relevant facts. Depending on the circumstances, payment arrangements can be made with the IRS.

 

IRS Hard at Work Despite the Pandemic

Financial crimesIndividuals, who have failed to report their foreign financial accounts, may feel a sense of relief, in light of the corona virus and its effects on IRS investigations. Better think again!

The DOJ recently announced the superseding indictment of Dr. Charles Lieber, a former Chemistry chair at Harvard University for:

  • Failureto file Foreign Bank and Financial Accounts (FBAR) and;
  • Filing false federal income tax returns.

The initial indictment charges the former Harvard Chair withmaking false statements to federal authorities.

Lieber served as the principal investigator of the Lieber Research Group at Harvard University and received more than $15 million in federal research grants from 2008-2019. In addition, the charging document records that from 2012 until 2015,  Lieber served as a Strategic Scientist at Wuhan University of Technology (WUT) and thereafter as a Contract Participant in the Thousand Talents Plan (a program established by the Chinese government in 2008 for purposes of attracting global scholars to assist in Chinese development).

Subsequent indictment shows that Lieber entered into a three-year agreement with Thousand Talents that required WUT to pay Lieber a salary of up to $50k a month, living expenses totaling $150k and $1.5 million for purposes of establishing a research lab at WUT. The DOJ alleges that Lieber failed to report the income he received from WUT in 2013 and 2014 on his federal income tax return. Individual U.S. tax residents are required to report their income on a worldwide basis, irrespective of where the income is earned.

In addition to his failure to report the income Lieber received from WUT, the superseding indictment alleges that Lieber failed to file FBARS for 2014 and 2015 with respect to a foreign financial account he opened while in China in 2012. The account was opened to enable WUT and Thousand Talents to directly deposit Lieber’s salary and other payments. A U.S. person is required to file an FBAR (FinCen Form 114) if that person had a financial interest in or signatory authority over foreign financial accounts with an aggregated balance in excess of $10k during any time during the year. It is clear from the indictment that Lieber received more than $10k between salary and living expenses. Failing to report this amount as required by law under FBAR is a crime.

To avoid being indicted by IRS, it is crucial that U.S. persons in foreign countries to report all income earned for tax return purposes and file FBAR for any account(s) they have financial interest in/ signatory authority over with aggregate balance in excess of $10,000.