Do Criminal Convictions Deter Employment Tax Crimes?

Failing to pay taxes to the government is a crime. This includes failing to pay employment taxes withheld by employers from employee wages. The Treasury Inspector General for Tax Administration (“TIGTA”) just released a report suggesting that the government has failed to enforce employment tax crimes. The report argues that the IRS’s lax enforcement results in non-compliance.

TIGTA’s lack of deterrence argument is as follows:

  • As of December 2015, 1.4 million employers owed approximately $45.6 billion in unpaid
    employment taxes, interest, and penalties.
  • In FY 2015, the IRS assessed the TFRP [the trust fund recovery penalty, which is imposed on those who failed to pay the tax] against approximately 27,000 responsible persons—38 percent fewer than just five years before as a result of diminished revenue officer resources.
  • In contrast, the number of employers with egregious employment tax noncompliance (20 or more quarters of delinquent employment taxes) is steadily growing—more than tripling in a 17-year period.
  • Although the willful failure to remit employment taxes is a felony, there are fewer than 100 criminal convictions per year.
  • Since the number of actual convictions is so minuscule there is likely little deterrent effect.

So basically TIGTA arguments that non-compliance is at an all time high, enforcement has waned, and criminal convictions are basically non-existent for employment tax crimes. TIGTA argues for criminal punishment as a form of deterrence to encourage voluntary compliance from other similarly-situated taxpayers.

Deterrence is generally defined as the action of discouraging an action or event through instilling doubt or fear of the consequences. With employment taxes, this assumes businesses are aware of the IRS’s lax enforcement and knowing this, they willfully fail to pay over the employment taxes withheld from their employee’s wages.

From our limited perspective, few taxpayers know how the IRS handles unpaid employment taxes and they only learn of the IRS’s processes when the IRS asks about the tax. Even then, they do not learn that the IRS’s enforcement is lax.

But if the government stepped up its enforcement of employment tax crimes, would this lead to increased employment tax compliance? It does not seem like it would. Again, from our limited perspective, these taxes are usually not paid over to the government due to circumstances beyond the taxpayer’s control–such as accounting personnel who take steps to hide the issue. Increased criminal enforcement would do little to change the outcome in these cases.

It other cases it does not seem like increased criminal enforcement to encourage compliance is appropriate in this area. In many of these types of cases, the taxes are not paid due to difficult financial situations that often come down to paying suppliers or paying wages to loyal and hard working employees so the employees can keep their jobs and feed their families, versus paying the employment taxes to the government. From a criminal prosecution perspective, the TIGTA report is correct in noting that the law says that willful failure to pay the tax is a crime and that evil motive or bad purpose is not necessary for a conviction. Maybe increased criminal enforcement could produce additional compliance in these cases, but should the government focus its limited resources on this type of non-compliance versus other areas where non-compliance is more visible and clearly willful?

The IRS largely disagreed with the TIGTA report for these very reasons. As noted in the report, the IRS indicated that cases should only be considered for criminal referral where a firm indication of fraud is present.