Updates and guidance on key IRS practice developments.

• Author: Chambers, Valrie

Practice & Procedures

Employment tax enforcement is trending

[ILLUSTRATION OMITTED]

Employment tax enforcement is a critical element of the IRS's overall tax enforcement effort. It is an area in which the IRS has unique tools at its disposal--tools that some practitioners may find surprising. Recent government reports indicate a growth in "egregious employment tax noncompliance" and focus on the need to combat this trend through increased use of civil and criminal enforcement mechanisms (see, e.g., Treasury Inspector General for Tax Administration (TIGTA), "A More Focused Strategy Is Needed to Effectively Address Egregious Employment Tax Crimes," Rep't No. 2017-IE-R004). The need for increased employment tax enforcement is driven in part by the essential role that such taxes play in funding vital government programs and services, as well as the fact that the government views employers who willfully fail to account for and deposit employment taxes as effectively stealing from their employees and the U.S. Treasury. In light of these trends and reports, practitioners should have a basic awareness of some of the unique tools the government uses to enforce employment tax laws.

Employment taxes, defined to include withheld income, Social Security, and Medicare taxes, account for nearly 70% of federal taxes collected by the IRS. They are collected primarily through withholding and are, as the numbers suggest, vital to the integrity of the tax system. But while they make up a substantial portion of federal revenue, recent government reports indicate that they should be even greater. For instance, the IRS estimates that unpaid employment taxes accounted for $91 billion of the 2008-2010 average annual gross tax gap of taxes owed but not paid voluntarily and timely (IRS Publication 1415, Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2008-2010, p. 2 (May 2016)).

The IRS and the Department of Justice have made special efforts to publicly warn taxpayers that employment tax enforcement is currently among the nation's top tax enforcement priorities. The TIGTA report cited above indicates that even greater efforts are needed, hinting that the IRS should more aggressively assert trust fund recovery penalty assessments and recommending that the IRS expand its criteria for criminal referrals in the employment tax context. The report, while generally critical of inadequate employment tax enforcement, comes on the heels of the IRS's release of its 2016 Data Book, which indicates a greater than 40% increase in all employment tax civil penalties assessed in fiscal 2016 from those in 2015. These factors and trends signal that a greater focus on employment tax enforcement is underway and likely to continue.

A potent tool: The trust fund recovery penalty

The trust fund recovery penally under Sec. 6672 is a basic procedural weapon that allows the IRS to assess a civil penalty against any "responsible person" who willfully fails to pay over a business's withheld employment taxes. In addition, Sec. 7202 makes it a crime to willfully fail to collect or pay over these taxes. There is significant overlap between the two provisions, and civil trust fund recovery penalty investigations are often a ripe source for criminal referrals. Practitioners advising or representing taxpayers with civil trust fund penalty exposure should, therefore, always remain cognizant of potential criminal...