It is a reasonably common practice for certain business owners to pay workers “under the table” or “off the books.” Oftentimes, the business owner engages in this practice because he or she believes that the action will save the company money and avoid tedious record-keeping responsibilities. Workers often agree to go along with the practice because they believe the money to be tax-free. Unfortunately, there are consequences to this behavior, ones that can produce harsh results not only for the business, but also for the business owner and the employee. Concerned about potential tax troubles? Contact a Sacramento tax attorney of NewPoint Law Group.
Payroll tax fraud investigations can arise at either the state or federal level. In California, the Employment Development Division enforces the obligation to pay employment taxes. For business owners, detection at the state level often means that their problems are just beginning, as the EDD freely shares tax information with the IRS. This information can then be used by the IRS to pursue the business and responsible parties for the nonpayment or underpayment of federal employment tax.
Potential Consequences for Employers Who Pay Employees Off the Books
For business owners who rely on “under the table” payments to workers, the risk of facing an audit can be substantial. The IRS and state agencies like the California EDD are particularly rigorous regarding the identification of payroll tax non-compliance. The agencies make use of statistical methods and can compare the company’s payroll to other similar businesses. Significant deviation from the norm is often grounds for an audit. Furthermore, an “employee” who attempts to claim unemployment or who attempts to gain leverage in employment disputes also lead to identification and enforcement action. The failure to pay Social Security and related employment taxes are rather severe, since “responsible parties” can be held personally liable for the unpaid taxes.
Who Is a “Responsible Party”?
The employment taxes belong to a category of taxes known as “trust fund” taxes because, per IRC § 7501, these taxes are to be held in a special trust account for the United States. Individuals who fail to take this action may be subject to the Trust Fund Recovery Penalty as set forth in IRC § 6672(a). This holds that any person who is required to “collect, truthfully account for, and pay over” employment tax and other taxes–and willfully attempts to do so–can be liable for “a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.” Individuals who may be considered a “responsible party” and held liable for the unpaid tax can include:
- Corporate officers
- Corporate directors
- Payroll service providers
- Professional employer organizations
- Responsible parties within a payroll service provider or professional employer organization
Employees Also Face Consequences for Off the Books Income
Employees also face consequences when they do not file taxes on all sources of income. If there is a need to collect unemployment, employees are unlikely to be eligible for benefits. If the worker gets hurt on the job, he or she is often ineligible for workers’ comp. benefits. Moreover, the employee’s “under the table” work also places their future Social Security benefits at risk. These are but a few of the consequences the workers can face. In short, the practice can have serious, life-altering repercussions for both parties.
Cash-Intensive Businesses Already Face Increased Scrutiny
It is important to note that both the IRS and the EDD recognize that businesses which deal exclusively or predominately in cash are presented with a greater opportunity to commit various types of fraud, including payroll fraud. This means that businesses like restaurants, convenience stores, auto dealers, gas stations, check cashing stores, liquor stores, and many other businesses already face an enhanced risk and rigorous audit techniques. These and other businesses are subject to an array of audit techniques, such as comparisons to similar businesses in similar industries and statistical audit techniques. Red flags can involve significantly fewer employees, implausible explanations regarding operations, and other signs that will trigger an extremely meticulous audit or a criminal investigation for tax fraud.
If You’re Facing an IRS Audit, Contact a Sacramento Tax Lawyer of NewPoint Law Group
If your business faces an audit when you have paid wages under the table, or have otherwise failed to adhere to payroll tax obligations, don’t attempt to handle an audit alone. Likewise, household employers who have paid a maid, nanny, or gardener $1,000 or more in off-the-books wages are also subject to fines and penalties. An experienced Sacramento tax audit attorney of the NewPoint Law Group can fight to protect you from a worst-case scenario. To discuss how we can steer and manage an audit, call us at 1-800-358-0305 or contact us online today.