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Yahoo
a day ago
- Business
- Yahoo
How the IRS catches tax cheats: 3 ways your tax return may get flagged
Cheating on your taxes is a form of high-stakes gambling. You might catch a break and evade suspicion, but the IRS is incentivized to go after those Americans who don't pay what they owe — an amount that totals hundreds of billions in unpaid taxes each year. An estimated $514 billion in individual income taxes went unpaid in 2022, according to the most recent IRS data. Add in unpaid corporate, employment and estate taxes and the tax gap that year was $696 billion. Enforcement actions and late payments reduced that amount by an estimated $90 billion. Some Americans may be even more tempted to roll the dice now that the IRS has slashed its workforce by 25 percent so far this year, according to the most recent data from the Treasury Inspector General for Tax Administration. While 84 percent of taxpayers say it's 'not at all acceptable' to cheat on income taxes, 29 percent agree it's fair to avoid paying some taxes if they no longer trust the government will spend taxpayer dollars wisely, according to 2024 results of an annual taxpayer attitude survey conducted by the IRS. That's a pretty blasé attitude about a crime that carries consequences ranging from steep fines to potential prison time. Learn more: Tax fraud: What it is and what you should know to avoid scams And, while workforce cuts at the IRS could reduce audit activity, the IRS has other ways to monitor for cheating, says Heather Liston, a certified financial planner and principal of Clarity Financial in San Francisco. In particular, the IRS uses what's known as a DIF score (for 'discriminant function') to identify problematic returns, and the ratios are intentionally kept a secret so people can't game the system. 'We don't know what they are because the IRS doesn't want us to know what they are,' Liston says. Some common issues that raise potential 'cheating' flags with the IRS include math errors, underreporting income, unusually high business expenses or tax deductions, failing to take required minimum distributions from retirement accounts, and cost basis issues with restricted stock units or real estate transactions, Liston says. Here are three ways the IRS monitors tax returns for cheating. 1. Your numbers don't match third-party data When filing your taxes, you must input your wage information from the W-2 form your employer provided to you, along with income you may have earned from other sources that's documented on various 1099 forms. Those companies must also supply that information to the IRS. And the figures should match. 'What the IRS really likes, and strives for, is third-party reporting because there's very little opportunity for cheating,' says Mark Luscombe, a certified public accountant and principal analyst at Wolters Kluwer Tax & Accounting in Chicago. That's because it's easy for the IRS to identify reporting discrepancies that are problematic, he says. If the income or payment information you input doesn't match what was sent to the IRS, you will receive a CP2000 notice from the IRS. Read the CP2000 notice to understand why the IRS believes there's a discrepancy and what you need to do next, Liston says. Even if your inclination is to shove this notice under a stack of papers and ignore it, it's important that you take action. Call the phone number provided right away if you need more time to figure out why the problem occurred, she adds. There may be rare circumstances in which you knowingly provide information to the IRS that's different than what's on the tax form — in which case you should document why you're doing so, Luscombe says. Otherwise, the problem is often easily solved, though you may need to send more money for unpaid taxes. The longer it takes to resolve the issue, you could incur more interest on unpaid taxes and penalties, Liston says. That's why it's best to try to avoid receiving this notice in the first place. 'Anything a computer can catch, it will,' Liston says. 'In a way, it's a little bit silly the IRS makes us go through the exercise of filling out the information because they already know it.' Learn more: 2025 tax brackets and federal income tax rates 2. Your self-employed business income or expenses seem off While the IRS's exact methods for identifying potential instances of cheating remain a mystery, the agency does scrutinize the information that taxpayers report on Schedule C, Liston says. This form applies to taxpayers who are self-employed, either operating a business as a sole proprietor or working as a freelancer. Learn more: Schedule C: What it is and how it works If you claim very high business expenses every year — particularly in relation to your income — that could draw the attention of the IRS, Liston cautions. And while you should claim expenses you're entitled to, it's important to be accurate, Luscombe says. There's a long-held myth that home office-related expenses can trigger an audit. There's no evidence that's true, though these expenses could raise some red flags. There's 'clearly the potential for abuse' with taxpayers claiming a home office that's actually a part of the house that's not exclusively used as a home office, as the IRS dictates it should be, Luscombe says. 'I suspect there are a lot of 'home offices' where the kids go in and watch movies and the like.' The IRS won't appear on your doorstep to confirm your home office is the size you claim or that it's being used exclusively for that purpose, but that myth could be a good reminder to be cautious. When possible, Liston says, be sure to have documentation of expenses like meals or transportation costs. But just because these expenses could elicit extra scrutiny by the IRS, Liston notes, 'that doesn't mean you shouldn't claim them.' Learn more: The home office deduction: Who qualifies and how to calculate it 3. Your tax deductions or credits seem fishy The standard deduction for taxpayers was nearly doubled as part of the Tax Cuts and Jobs Act of 2017, which now means that less than 10 percent of taxpayers claim itemized deductions. (That higher standard deduction, plus a new inflation adjustment for 2025, was made permanent as part of the megabill that was signed into law in July.) Abuses of itemized deductions, particularly related to the value of charitable donations, was once something the IRS closely monitored to identify potential instances of fraud, Luscombe says. And it still does, albeit among the now-minority of taxpayers who itemize deductions. There are other tax breaks that many Americans can claim that may also seem fishy to the IRS. The IRS seems 'very concerned,' Liston says, with catching people who cheat in some way when claiming the earned income tax credit (EITC) for low- to moderate-income workers and families. While it's hard to know exactly what the IRS scrutinizes, it's important to only claim deductions that legitimately apply to your situation. Learn more: 10 easy tax deductions and credits to trim your tax bill Resist the urge to underreport your income Not all income is reported to the IRS through a third-party source, and it may be particularly tempting to omit this information while filing your taxes. That's because companies are only required to send you — and the IRS — a 1099 form for payments that exceed certain thresholds. And those thresholds were recently raised for some of the most common 1099 forms. Even if you made less than the amount required to generate a form, the IRS is looking for taxpayers who don't report all of their income, no matter whether they do so intentionally or mistakenly. 'That could be an honest mistake, but you still need to get caught up and make it right,' Liston says. You should receive a 1099 form if you did contract or freelance work that totaled at least $600 for one company in 2025, though the massive new tax bill signed into law in July boosts the reporting threshold for 1099-NEC and 1099-MISC forms to $2,000 starting in 2026. That same tax law also changed the reporting threshold for 1099-K forms — which report payments of goods and services on platforms like Venmo, Cash App and PayPal — to $20,000 plus 200 transactions. That reporting threshold is now in effect for 2025. The IRS has been pushing for more third-party reporting, especially in the case of the 1099-K forms, to ensure taxpayers are fairly reporting all of their income, Luscombe says. But the agency has been challenged by companies that argue this paperwork is unduly burdensome, he adds. The higher reporting thresholds — meaning that you can receive a higher amount of freelance income without the company that paid you reporting it — may tempt you to report less income. But knowingly omitting this income when you file your tax return is fraud. Even if it seems unlikely the IRS will catch you, you don't get off the hook for reporting income just because you don't receive a form for it, Liston says. 'I never advise anyone to lie about that,' she says. 'You are responsible for reporting all of your income.' Get started: Match with an advisor who can help you achieve your financial goals Why double-checking your tax return is so important Before you file your taxes, go through your return to make sure nothing stands out as peculiar. A vast majority of taxpayers now file their taxes electronically, which has reduced simple math errors, but you could still make a small mistake that will result in a big headache with the IRS. Receiving a notice in the mail from the IRS about a problem with your return, while unpleasant, doesn't necessarily suggest you'll be audited or accused of fraud. It's 'really important' not to panic, Liston says, though you need to take these notices seriously and reply in a timely manner, and that's particularly true if you have an explanation for why the information you supplied differs from the IRS's calculation. And you won't be surprised by a notice that immediately accuses you of tax fraud. Rather, that accusation will only come after a series of notices and fair warning before the IRS formally accuses you of tax fraud after a thorough investigation. Finally, your intent matters. Some taxpayers confuse tax avoidance via legitimate planning and legitimate tax strategies with tax evasion, in which you're illegally trying to lower your tax obligation. The two terms are very different, Luscombe says. 'Fraud implies a willfulness to it.' Learn more: Tax avoidance vs. tax evasion: One's illegal, the other is smart financial planning Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Forbes
23-07-2025
- Business
- Forbes
Government Watchdog Confirms Mass Exodus Of IRS Employees—More Cuts Are Expected
WASHINGTON, DC - APRIL 15: The Internal Revenue Service (IRS) building stands on April 15, 2019 in Washington, DC. (Photo by) Getty Images The IRS workforce dropped from 103,000 employees in January 2025 to approximately 77,000 in May 2025 (a 25% reduction). Those numbers, which have been previously reported, have now been confirmed by the Treasury Inspector General for Tax Administration (TIGTA). According to IRS records, more than 25,000 employees either separated, accepted a deferred resignation program offer, or took some other incentive to leave. These departures represent 25% of the IRS's workforce—and some job positions were impacted more than others. For example, approximately 27% of tax examiners (they review and process tax returns) and 26% of revenue agents (they conduct audits) left the agency. Beginning in January 2025, the IRS began to take steps to reduce the size of its workforce. This was the result of executive orders issued by President Donald Trump and subsequent guidance from the Office of Personnel Management (OPM). While the President has repeatedly called for significant reductions in the size and scope of the federal government workforce, the tax agency has been a particular target. In February 2025, the Internal Revenue Service had approximately 103,000 employees. By March, more than 11,400 of those workers had received termination notices as probationary employees or voluntarily resigned under the so-called "Fork in the Road" or Deferred Resignation Program (DRP) pushed by the Department of Government Efficiency (DOGE). Depending on their circumstance, IRS employees could be eligible for one of three Treasury incentive offerings: (1) Treasury Deferred Resignation Program; (2) Treasury Deferred Resignation Program and Voluntary Early Retirement Authority ; or (3) Voluntary Separation Incentive Payment. Treasury Deferred Resignation Program (TDRP version 1) The deferred resignation program allowed federal employees to resign but retain all pay and benefits through September 30, 2025, or later if the employee's retirement date was between October 1 and December 31, 2025. Employees who were working from home and accepted this offer were also exempted from any return-to-office requirements. Employees had until February 6 to opt into the program. The IRS subsequently recalled some of these resigned workers to work, noting that specific, critical tax return filing season positions would be exempt from the DRP until May 15, 2025. Those who had previously accepted the offer and stopped working but fell within the exception were advised they would be told when to return to work. As of May 2025, 4,575 IRS employees were approved for the program. These employees are on administrative leave with pay and benefits until their separation—in other words, the government has been paying these employees to not work. Treasury Deferred Resignation Program (TDRP and VERA) In April 2025, the IRS offered a second DRP to its employees. This version also included paid leave and benefits through September 30, 2025. Employees were also offered the opportunity to claim an 'early out' retirement. Under the Voluntary Early Retirement Authority (VERA) program, the age and service requirements for retirement were temporarily lowered to increase the number of employees who are eligible for retirement. Employees taking the VERA were required to officially separate under the TDRP. Over 23,000 employees applied for the TDRP. TIGTA has confirmed that 17,071 employees were approved. Voluntary Separation Incentive Payment (VSIP) The Voluntary Separation Incentive Payment (VSIP) was widely referred to as a 'buyout.' Under the VSIP, agencies can offer employees lump-sum payments up to $25,000 (or the employee's severance pay amount, whichever is less) as an incentive to retire or resign. TIGTA has confirmed that 776 employees were approved for the VSIP. Probationary Employees In January 2025, the IRS, like other federal agencies, was asked to identify all employees on probationary periods. While probationary employees are often recent hires (meaning within the last one to two years), they don't have to be—those who have been serving for years but were recently moved or promoted into a new position also qualify as probationary. The IRS subsequently fired approximately 7,000 probationary employees in response to an executive order signed by President Trump on February 11, 2025. Following the order, the Office of Personnel Management advised various federal agencies, including the Department of the Treasury (which includes the IRS), to fire non-essential probationary employees. Several legal challenges followed, and in March, U.S. District Court Judge William Alsup for the Northern District of California ordered six agencies, including the Treasury Department, to rehire the employees. In his ruling, Alsup said the federal government was required to follow normal reduction in force (RIF) rules. The government appealed the ruling—that case is currently pending in the Ninth Circuit Court of Appeals. In the meantime, the matter was escalated to the U.S. Supreme Court, which paused Alsup's order on administrative grounds. The unsigned Supreme Court order indicated that the group of unions and non-profit groups lacked standing to sue. Standing is a legal term that refers to your right to bring a lawsuit or have a court hear your case—to be heard, you typically have to show that another party has harmed you and that the only fix for that harm can be found in court. The idea is to ensure that matters that end up in court aren't frivolous and are raised by the right parties. The Supreme Court's order does not mean that it found the firings lawful, just that the wrong parties raised the issue in court. In May 2025, IRS and Treasury decided to return all probationary employees to full work status by May 23, 2025. However, in July 2025, the U.S. Supreme Court lifted the federal court's prohibition on covered agencies implementing Agency RIF and Reorganization Plans and issuing or executing RIF notices. According to TIGTA, it is unclear whether any terminated probationary employees called back to work will be subject to a large-scale RIF. Reduction in Force Actions and Administrative Leave In February 2025, the President signed an executive order that advised federal agencies to begin preparations to initiate large-scale RIFs. In April 2025, the IRS began implementing a RIF that resulted in involuntary staffing cuts across multiple offices and job categories. As of May 2025, 294 employees in three offices (Office of Civil Rights and Compliance, Taxpayer Experience Office and Taxpayer Service's Office of Equity, Diversity and Inclusion) received RIF notices. However, a district judge placed an injunction on the removal of these employees. In addition, in March 2025, 48 senior Information Technology employees were placed on administrative leave. Of the 48 employees, 26 took the Treasury incentive offerings, while 22 remain on administrative leave. Other Separations TIGTA also identified an additional 3,093 employees classified as other separations—such as resignations, retirements, and terminations—since January 2025. According to the IRS, 752 of these are probationary employees who received termination notices and decided to resign. These employees did not participate in the DRP, TDRP, or other offerings from the IRS. Business Units Business units at the IRS were impacted at different rates. IRS employee reductions, by business unit. Kelly Phillips Erb The top six business units affected by the cuts are: Small Business/Self Employed (SB/SE) helps small business and self-employed taxpayers understand and meet their tax obligations. SB/SE reported a 35% reduction. The Human Capital Office (HCO) supports IRS employees with Human Resource topics. HCO reported a 28% reduction. Information Technology (IT) supports IRS employees by delivering IT services and solutions. IT reported a 25% reduction. Tax Exempt & Government Entities (TE/GE) helps taxpayers with pension plans, exempt organizations, and government entities comply with tax laws. TE/GE reported a 25% reduction. Taxpayer Services (TS) helps taxpayers understand and comply with tax laws. TS reported a 20% reduction. Large Business and International (LB&I) helps corporations and partnerships with assets greater than $10 million to comply with tax laws, including emerging international issues. LB&I reported a 19% reduction. Geographical Impact Every state, including the District of Columbia and Puerto Rico, has been impacted by the reductions. To date, TIGTA reports that California, Georgia, New York, Texas, and Utah have the highest numbers of anticipated employee separations. Delaware, Idaho, Iowa, Maine, and Mississippi have the highest percentage of anticipated employee separations compared to the IRS workforce in those states. Hiring Freeze In addition to mandatory reductions, IRS employee levels will also be impacted by attrition, including those employees opting for retirement. Importantly, they will not be replaced. As part of his January 20 executive order, Trump issued a hiring freeze that was intended to be temporary, with one exception—the IRS. While the freeze was slated to expire for other federal government agencies after 90 days, the hiring freeze for the IRS will remain in place until "it is in the national interest to lift the freeze." In her recent report to Congress, the National Taxpayer Advocate recommended that the hiring freeze be lifted so that the IRS can hire essential filing season staff to meet taxpayer needs next year. This needs to happen by the end of summer, she says, to allow time for onboarding and training by January. That will be particularly important following recent changes in the tax law, thanks to the One Big Beautiful Bill Act, including new, temporary deductions for seniors, tipped workers, employees who work overtime, and taxpayers who buy new cars. In addition to getting its employees up to speed on those issues, IRS has been tasked with issuing guidance, including new withholding tables. It's also likely the case that Forms W-2 and 1040 will need a redesign—and IRS systems will have to follow suit. Getting all of that together before the filing season, especially with a reduced workforce, will be a challenge. A successful filing season, Collins wrote in her report, 'is not only an IRS imperative but also a national one.' About TIGTA TIGTA was established in January 1999 by the IRS Restructuring and Reform Act of 1998 to provide independent oversight of IRS activities. Today, TIGTA provides audit, investigative, and evaluation services to promote integrity, efficiency, and economy in the administration of the nation's tax system. While TIGTA sits organizationally within the Department of the Treasury and reports to the Secretary of the Treasury and to Congress, the agency is considered to be independent. Forbes Under Trump, IRS Has Shed More Than 11% Of Its Workforce. More Cuts Are On The Way By Kelly Phillips Erb Forbes Taxpayer Advocate Calls 2025 Filing Season A Success But Waves Warning Flag On Cuts By Kelly Phillips Erb Forbes What The One Big Beautiful Bill Act Will Mean For You And Your Business By Kelly Phillips Erb Forbes IRS Issues Guidance On New Deductions For Seniors, Tips, Overtime And Car Interest By Kelly Phillips Erb
Yahoo
11-05-2025
- Business
- Yahoo
Elon Musk's DOGE Cuts To IRS Could Mean 'Christmas Coming Early' To 'Wealthy Tax Dodgers,' Warn Experts
The Trump administration is drastically reducing the workforce at the Internal Revenue Service (IRS), a move that could potentially lead to a rise in tax evasion. What Happened: Initial cuts by the Department of Government Efficiency (DOGE), overseen by Elon Musk, have resulted in the loss of around one-third of IRS auditors. As of March 2, over 3,600 revenue agents had either been let go or accepted a buyout. Additionally, 600 revenue officers, who serve as the government's debt collectors, have also left. In total, 11% of the IRS staff have left. These figures were revealed by the Treasury Inspector General for Tax Administration, reported Fortune. Trending: Shark Tank's Kevin O'Leary called Missing Ring his biggest mistake — don't repeat history — . Vanessa Williamson, a senior fellow at the Urban-Brookings Tax Policy Center, said, 'There have never been cuts to the IRS on this order—never.' She noted that this could offer 'a lot more leeway when it comes to tax enforcement.' "It's basically Christmas coming early if you cheated on your taxes this year,' Williamson told the publication. Further staff reductions are expected, with up to 40% of IRS jobs potentially in danger, as per the Federal News Network. This could significantly affect the government's revenue collection, as the IRS collects 96% of the nation's revenue. The Congressional Budget Office notes that every dollar spent on IRS enforcement brings in a return of $5 to $ It Matters: The IRS had previously anticipated a revenue shortfall of over $500 billion due to tax evasion and staffing cuts. The Trump administration had already begun dismissing approximately 20,000 agency staff, primarily focusing on recent hires in the taxpayer services and enforcement divisions. Additionally, the IRS saw a leadership shakeup following a clash with billionaire Elon Musk. The acting commissioner of the IRS, Gary Shapley, was replaced after disagreement with Musk, raising concerns about Musk's influence within the Trump administration. Treasury Secretary Scott Bessent, reportedly unaware of Musk's involvement, voiced his dissatisfaction to President Trump, who subsequently approved reversing Shapley's appointment. That said, critics argue that reducing the IRS could lead to a significant increase in tax evasion, particularly among the highest income earners. In March, over 130 House Democrats warned former acting IRS Commissioner Melanie Krause that recent staffing cuts could hinder efforts to collect unpaid taxes from 'wealthy tax dodgers.' Read Next: Invest where it hurts — and help millions heal: Invest in Cytonics and help disrupt a $390B Big Pharma stronghold. Deloitte's fastest-growing software company partners with Amazon, Walmart & Target – Many are rushing to grab 4,000 of its pre-IPO shares for just $0.30/share! Image via Shutterstock Send To MSN: Send to MSN Up Next: Transform your trading with Benzinga Edge's one-of-a-kind market trade ideas and tools. Click now to access unique insights that can set you ahead in today's competitive market. Get the latest stock analysis from Benzinga? This article Elon Musk's DOGE Cuts To IRS Could Mean 'Christmas Coming Early' To 'Wealthy Tax Dodgers,' Warn Experts originally appeared on © 2025 Benzinga does not provide investment advice. All rights reserved. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
10-05-2025
- Business
- Yahoo
Elon Musk's DOGE Cuts To IRS Could Mean 'Christmas Coming Early' To 'Wealthy Tax Dodgers,' Warn Experts
The Trump administration is drastically reducing the workforce at the Internal Revenue Service (IRS), a move that could potentially lead to a rise in tax evasion. What Happened: Initial cuts by the Department of Government Efficiency (DOGE), overseen by Elon Musk, have resulted in the loss of around one-third of IRS auditors. As of March 2, over 3,600 revenue agents had either been let go or accepted a buyout. Additionally, 600 revenue officers, who serve as the government's debt collectors, have also left. In total, 11% of the IRS staff have left. These figures were revealed by the Treasury Inspector General for Tax Administration, reported Fortune. Trending: Shark Tank's Kevin O'Leary called Missing Ring his biggest mistake — don't repeat history — . Vanessa Williamson, a senior fellow at the Urban-Brookings Tax Policy Center, said, 'There have never been cuts to the IRS on this order—never.' She noted that this could offer 'a lot more leeway when it comes to tax enforcement.' "It's basically Christmas coming early if you cheated on your taxes this year,' Williamson told the publication. Further staff reductions are expected, with up to 40% of IRS jobs potentially in danger, as per the Federal News Network. This could significantly affect the government's revenue collection, as the IRS collects 96% of the nation's revenue. The Congressional Budget Office notes that every dollar spent on IRS enforcement brings in a return of $5 to $ It Matters: The IRS had previously anticipated a revenue shortfall of over $500 billion due to tax evasion and staffing cuts. The Trump administration had already begun dismissing approximately 20,000 agency staff, primarily focusing on recent hires in the taxpayer services and enforcement divisions. Additionally, the IRS saw a leadership shakeup following a clash with billionaire Elon Musk. The acting commissioner of the IRS, Gary Shapley, was replaced after disagreement with Musk, raising concerns about Musk's influence within the Trump administration. Treasury Secretary Scott Bessent, reportedly unaware of Musk's involvement, voiced his dissatisfaction to President Trump, who subsequently approved reversing Shapley's appointment. That said, critics argue that reducing the IRS could lead to a significant increase in tax evasion, particularly among the highest income earners. In March, over 130 House Democrats warned former acting IRS Commissioner Melanie Krause that recent staffing cuts could hinder efforts to collect unpaid taxes from 'wealthy tax dodgers.' Read Next: Invest where it hurts — and help millions heal: Invest in Cytonics and help disrupt a $390B Big Pharma stronghold. Deloitte's fastest-growing software company partners with Amazon, Walmart & Target – Many are rushing to grab 4,000 of its pre-IPO shares for just $0.30/share! Image via Shutterstock Send To MSN: Send to MSN Up Next: Transform your trading with Benzinga Edge's one-of-a-kind market trade ideas and tools. Click now to access unique insights that can set you ahead in today's competitive market. Get the latest stock analysis from Benzinga? This article Elon Musk's DOGE Cuts To IRS Could Mean 'Christmas Coming Early' To 'Wealthy Tax Dodgers,' Warn Experts originally appeared on Error while retrieving data Sign in to access your portfolio Error while retrieving data Error while retrieving data Error while retrieving data Error while retrieving data
Forbes
25-04-2025
- Business
- Forbes
IRS Payroll Tax Violations Can Draw Big Penalties And Even Prison
Audit fraud. Handcuffs and money. Economic crime concept. The IRS can be tough on collecting income taxes, and even tougher where payroll taxes are concerned. The money is withheld from employee wages, and is supposed to be paid over to the IRS, promptly. If the IRS doesn't get it, the losses can mount quickly. This is trust fund money that belongs to the government, and no matter how good a reason the employer has for using the money for something else, the IRS is strict. The IRS can target the owners of the business, plus check signers and other responsible persons who had a role--or could have had a role--in the failures to pay. Sometimes, the IRS even goes after third parties, even criminally. If convicted, the sentences can be stiff. Any failure to pay—even late payment—is serious, regardless of how or why the employer or its principals use the tax money for something else. Using the money to pay suppliers and keep the business open isn't a good reason in the IRS view. Payroll services are one common answer, so the employer doesn't have discretion to use the money to pay vendors or for anything else. But what if the payroll service takes the money? That horrific possibility features prominently in a report from the Treasury Inspector General. So be careful who you hire too. When a tax shortfall occurs, the IRS will usually make personal assessments against all responsible persons who have ownership in or signature authority over the company and its payables. The IRS can assess a Trust Fund Recovery Assessment, also known as a 100-percent penalty, against every 'responsible person" under Section 6672(a). You can be liable even if have no knowledge the IRS is not being paid. If you are a responsible person the IRS can pursue you personally for payroll taxes if the company fails to pay. The 100% penalty equals the taxes not collected. The penalty can be assessed against multiple responsible persons, allowing IRS to pursue them all to see who coughs up the money first. "Responsible" means officers, directors, and anyone who makes decisions about who to pay or has check signing authority. A recent example involve a Maryland man who was convicted of 16 counts of failing to collect and pay over payroll taxes. Brett Hill, of Parkton and Berlin, was the Chief Executive Officer of two telecommunications companies, who was recently convicted of failing to pay payroll taxes. Hill was responsible for withholding federal income, Social Security, and Medicare taxes from his employees' wages and paying them over to the government. He was also responsible for filing tax returns and paying the companies' share of Social Security and Medicare taxes. He withheld taxes from employee wages but he failed to file tax returns or pay the withheld amounts over to the government. Hill did not pay over his companies' share of the taxes either, and the tax loss was over $1 million. When he is sentenced, he could face a maximum penalty of five years in prison for each count of failing to collect and pay over taxes. The IRS focus on payroll taxes is nothing new. Some years ago, the Treasury Inspector General for Tax Administration issued a report with some shocking figures about serious employment tax crimes. The number and size of payroll tax violations is up, and mere IRS penalties are not enough to stop the trend. Employment tax embezzlement is a felony punishable by up to five years in prison, and the report urged the IRS Criminal Investigations Division to act. The report recommended that both the civil and criminal divisions of the IRS should more aggressive with egregious employment tax cases. The report suggested that IRS collection personnel should expand their criteria for referring potential criminal cases to that division of the IRS. When employers fail to timely account for and deposit employment taxes, which they hold in trust on behalf of the federal government, the consequences can be serious.
