Employment Tax Evasion
According to the Internal Revenue Service (IRS), employment evasion schemes are common. Employment tax evasion involves individuals, employers, and companies that attempt to evade paying income taxes illegally. If convicted of tax evasion, you could serve 5 years in a federal prison and have to pay a $250,000 fine. Business tax evasion is punishable by a $500,000 fine.
If you or your business is under investigation by the IRS, we urge you to speak with an attorney from Okabe & Haushalter as soon as possible. Without an experienced legal representative, you may have difficulty substantiating your innocence in court.
Common Employment Tax Evasion Schemes
The IRS identifies at least eight common employment tax evasion schemes:
- Employment leasing
- Frivolous arguments
- Offshore employment leasing
- Worker status classification schemes
- Cash payment
- Fraudulent payroll returns/no returns
- Executive compensation disguised as corporation distribution
Three of the most prominent ones are explained below:
- Pyramiding: Pyramiding involves withholding tax payment from employees’ incomes but never remitting it to the IRS. Usually, employers who practice this scheme collect the money and put it toward other business expenses, accumulating so much tax debt that the business eventually files bankruptcy.
- Employment Leasing: Some companies hire third-party payers to handle their financial matters. Like pyramiding, unreliable third-party payers withhold income tax but never turn it over to the IRS. Because this crime is so easy to commit, the IRS encourages businesses who hire third-party companies to make sure employment taxes are actually being paid to the IRS. Otherwise, the company could collect millions of dollars in tax debt.
- Offshore Employment Leasing: Generally speaking, companies who practice offshore employment leasing arrange for their employees to leave and then re-hire them through a contract arranged by a leasing company. Their salaries are paid through offshore accounts and hidden from the IRS. Without knowledge of the money, the IRS cannot demand income tax payment. In other situations, employers simply misclassify their employees’ worker status, treating them as independent contractors to evade income tax.
Who is responsible for these evasion schemes?
Although some employment tax evasion schemes are committed without the knowledge of the employees, cash payments rely on a mutual understanding between the employer and the employee. By paying employees with cash, the employer effectively avoids income tax payments. However, employees may lose future benefits through cash payments. Failing to file a tax return is one of the most simply forms of evasion. Similarly, some employers falsify their tax returns to avoid withholding money for tax payments from their employees’ paychecks.
Although employers are responsible to withhold taxes from their employees’ paychecks, employees may be held somewhat responsible. For example, if your employer fails to withhold taxes from your income and you are aware of their crime, you may be held partially liable.
To learn more about income tax evasion and criminal tax defense, call Okabe & Haushalter. The sooner we hear from you, the sooner we can answer your questions.