Problems with employment taxes and the employee trust fund can be the death knell for a small business owner. The California District Court’s decision in United States v. Guerin illuminates the personal risks that small business owners and company executives face in regards to the trust fund and employment taxes. Responsible officers can face personal liability for their company’s unpaid employment taxes if the failure to pay over the taxes is determined to be willful.

Risks To The Small Business Owner

small business owner, pyramiding

The Judge Does Not Care For Executive Excuses

What the Guerin decision truly demonstrates is that willfulness is not a difficult legal standard for the government to satisfy when it comes to a small business owner. If a small business owner in question was aware of the unpaid employment taxes and authorized payments to other creditors, willfulness is almost impossible to deny in court. It is not just a question of taking illegal actions that makes you guilty, but of being aware and not taking actions as well.

In small company, the small business owner almost always will be aware of the fact that employment taxes are not being paid. Moreover, the small business owner will not be surprised to learn that company funds are being used to pay other creditors and such payments in most cases have been directly authorized. In addition, the small business owner may also face criminal liability for failing to pay withholding taxes.

 Employment Taxes & Pyramiding

The IRS describes this fraudulent practice as pyramiding. Pyramiding of employment taxes is when a business withholds taxes from its employees but intentionally fails to remit them to the IRS. Businesses involved in pyramiding frequently file for bankruptcy to discharge the liabilities accrued. One of its top enforcement priorities of the IRS Criminal Investigation Division in regards to employment taxes is combating the practice of pyramiding. Two recent criminal cases illustrate the efforts of the IRS and the Justice Department in the employment tax fraud area.

On April 30, 2014, the Justice Department announced that an attorney in Oklahoma had pleaded guilty to willfully failing to pay employment taxes in connection with his law practice. In United States v. Larry Douglas Friesen, the defendant failed to pay over to the IRS the federal income and FICA taxes due and owing during three tax quarters in the 2007 calendar year in the amount of approximately $320,000.

 Small Business Owner Caught

In another case, the Justice Department announced on April 11, 2014, that a physician in Indiana had been sentenced to a prison sentence of one year and a day for failing to pay employment taxes in connection with his medical practice. In United States v. Ronald Eugene Jamerson, the doctor in question deducted and collected from his employees’ paychecks federal income taxes and employment taxes in the amount of $63,929 over 11 tax quarters between 2006 and 2008. Despite collecting the Trust Fund, he failed to file the employment tax returns and pay over the related employment taxes. According to the plea agreement, the defendant was ordered to pay restitution to the IRS in the amount of $541,083 for unpaid individual income taxes and employment taxes.

As you can see from the above two cases involving small businesses, the penalties for failure to pay employment taxes and for violating the trust of the IRS are severe. If you are a doctor or a lawyer or an owner of a small business with trust fund problems and employment tax irregularities, you need the help of a tax resolution specialist. Please call (818) 704-1443 to learn about your options from The Tax Resolution Institute.