Can You Really Go to Jail for Unpaid Payroll Taxes?

The bad news is, yes, you can go to jail for unpaid payroll taxes. The good news is, this is generally only a risk if you’re willfully avoiding the IRS’s attempts to remedy the situation or you’re intentionally attempting to defraud the IRS or evade paying taxes.

Not paying payroll taxes isn’t necessarily a crime. But tax fraud and evasion are crimes, and if you committed these crimes to avoid paying payroll taxes, then the IRS may recommend a criminal investigation, which can lead to imprisonment. Going to jail for unpaid payroll taxes only happens in extreme cases.

If you’re worried about criminal exposure or just need help getting back into compliance with payroll taxes, contact us at the Timothy S. Hart Law Group today.

Key Takeaways

• Willfully and intentionally failing to pay payroll taxes is a crime that can lead to imprisonment, civil penalties, and even asset forfeiture.
• Federal law requires employers to withhold federal payroll trust taxes from employees’ checks and remit them to the IRS in a timely manner. This is a legal obligation.
• If you’re behind on payroll taxes, then your best course of action is to consult with a tax resolution attorney about your options before the IRS recommends your case for criminal prosecution. Prison time is avoidable.

What Are Payroll Taxes?

Before diving into the consequences of failing to remit payroll taxes, it’s important to understand exactly what these taxes are and who is responsible for paying them.

Federal income tax withholding is a process through which employers legally withhold a portion of an employee’s paycheck in order to give it to the government. The amounts withheld from each check cover Social Security tax and Medicare tax. Employers are legally obligated to withhold federal income taxes, too.

The IRS considers the withheld taxes as “trust fund taxes.” That’s because the employer is simply holding onto the money for the benefit of the U.S. Treasury. A business should never consider withheld payroll taxes as part of its profits or discretionary spending funds. The money is considered to legally belong to the U.S. government the moment it is withheld. This money should be remitted to the IRS at specific intervals as outlined by federal law.

Who’s Responsible for Depositing Withheld Taxes?

Per the Internal Revenue Code (IRC), employers are fundamentally and legally obligated to withhold and remit these taxes for any employee they hire. A failure to do so is taken extremely seriously. Negligence, recklessness, or ignorance of the law are not considered valid defenses for failing to uphold your legal duty.

Under federal IRC laws, multiple individuals within a business could potentially be considered legally responsible for a business’s trust fund tax liability. The IRS will determine who should bear the consequences of non-compliance based on each individual’s status, duty, and authority within a business. A few examples of parties that could be held liable for not paying payroll taxes include partners, LLC members, shareholders, corporate officers, and directors. Anyone who has substantial control over a company’s finances or financial decision-making can be considered a “responsible party”.

What About Other Payroll Taxes?

In addition to withholding taxes from their employees’ accounts, employers must also make matching Medicare and Social Security contributions. These are also payroll taxes, but they aren’t considered to be trust fund taxes.

Generally, only the business is liable for this portion of the payroll taxes. The government cannot pierce the corporate veil and go after individuals for these taxes, like it can the trust fund portion of the payroll taxes.

Two Types of Consequences: Civil vs. Criminal

Once the IRS catches on to your non-compliance, they’ll alert you about the situation and remind you of your legal duty to comply. They may come to your business in person or send you Letter 5857 to schedule a phone call.

If you don’t act immediately, then the IRS will begin to initiate civil penalties under IRC § 6672. This statute allows the IRS to levy a trust fund recovery penalty (TFRP) against individuals who fail to remit payroll taxes. This penalty will be equal to the exact amount of the withheld payroll taxes.

To figure out who is responsible, the IRS typically schedules Form 4180 interviews with potential responsible parties. Then, if the revenue officer thinks you’re responsible, they’ll send Letter 1153 through certified mail ^[a], which explains the proposed penalty and your right to appeal. If no action is taken, then the individual will become liable for the debt and incur the TFRP.

Under IRC § 7202, the willful failure to pay your tax debt is considered a criminal offense.

What Does “Willful” Mean to the IRS and DOJ?

Why does the IRS issue civil penalties in some situations and levy criminal charges in others? The answer lies in taxpayer intent. Intent matters under the law. While your intentions won’t stop you from incurring penalties, it will have an impact on the level of the penalties you face.

In order to be charged with a crime, you must have shown a willful intent not to pay what you owe. Per IRC § 6672, “willfulness” is defined as a conscious, voluntary, and intentional decision. In other words, the IRS must believe that you know and understand your tax obligations, have the ability to pay the debt, and have had the opportunity to do so.

Willfulness can be proven if you’ve ignored multiple IRS notifications, you used the payroll tax money to pay other debts, or you’ve continued utilizing your payroll tax withholdings for personal gain.

Keep in mind that the IRS doesn’t consider negligence or making a mistake criminal behavior. If you genuinely can’t pay and you can prove it with documentation, then that’s also not considered a criminal situation.

Yes, Jail is a Real Possibility in These Scenarios

When the IRS believes they can prove you’ve demonstrated a willful intent to skirt your payroll tax obligations, they will refer your case to the Department of Justice for criminal prosecution. Jail is a real possibility at this point, since prosecutors will work hard to investigate and prove your non-compliance. A few examples of evidence prosecutors can use against you are:

• A pattern of non-payment over several quarters or numerous businesses
• Trust fund balances that are high-dollar
• Intentional acts of deception or fraud, like lying to IRS agents, fabricating documents, or obstructing investigations
• Having a history of being assessed for TFRP and non-payment
• Using the withheld tax balance for personal or business expenses

This type of evidence, when proven without a reasonable doubt, is likely to lead to a conviction.

Penalties for Criminal Convictions Under IRC § 7202

A conviction could result in a sentence of up to five years in federal prison, fines of up to $250,000 for individuals and $500,000 for corporations, and a felony record. A felony conviction leads to lifelong consequences like the loss of your right to vote or possess firearms. On top of these penalties, you might also be ordered to pay restitution.

When You’re Less Likely to Face Jail Time

In a nutshell, you’re far less likely to face jail time if you show you are not willfully avoiding your obligations. When you’ve made an honest mistake, get in touch to resolve the issue as soon as possible. This shows you want to comply, even if you don’t have the money to pay off your balance right away.

You’re also less likely to face jail time if you didn’t have authority over making your business’s payroll tax payments. The IRS is less likely to criminalize your situation if you’re working with them to resolve your payroll tax issues or if you hire a tax professional to speak with them on your behalf.

What to Do if You’re Behind on Payroll Taxes

If you’re behind on fulfilling your payroll taxes, then the time to act is now. Your risk of suffering escalating consequences increases each day that you neglect your situation.

If you believe your tax case could lead to criminal consequences, then you need to take your situation seriously. Take extreme caution when speaking with IRS agents, since anything you say is likely being recorded and can be used against you later. Instead, consider consulting with a tax resolution attorney about potential resolution strategies.

Depending on the severity of your tax situation, you could be eligible to apply for a payment plan.

Can a Tax Resolution Firm Help Me Avoid Jail Time?

It’s possible to avoid jail time as a result of unpaid payroll taxes when you properly advocate for yourself and your business. That said, it can feel nearly impossible to know how to handle the situation, especially if you’ve already made the mistake of falling behind for a significant period of time. To level the playing field, it’s in your best interests to hire a tax resolution attorney to talk about relief options.

Get Legal Representation Now

Are you worried about current or past payroll tax issues? Here at Timothy S. Hart Law Group, P.C., our team has what it takes to protect your rights, aggressively advocate for you, and negotiate a deal that takes into consideration your personal circumstances and ability to pay.

Tim Hart graduated from Widener Law School and completed the Master’s in Taxation program at the University of Albany. He’s been admitted to practice in the U.S. Tax Court, and he’s a member of the New York Bar Association.

His qualifications, combined with success stories from satisfied clients, demonstrate he has what it takes to protect your rights in every tax situation. He can help you navigate IRS investigations, avoid criminal prosecution, resolve outstanding debts, and deal with all kinds of individual or business tax problems ^[b].

In general, the sooner you take action, the better the outcome will be for you. Call us now at (917) 382-5142 or fill out our online form to schedule a confidential consultation today.

Frequently Asked Questions: Payroll Tax Crimes

Do you have more questions about payroll trust taxes, your obligations as a business owner, or your options when you’ve fallen behind? Discussing your situation with an attorney is always the best way to get personalized, reliable legal advice that can benefit your situation and protect your rights. Generalized answers can help you, but only up to a certain point, and remember this type of advice may not apply to your specific circumstances.

What is the difference between the TFRP and criminal prosecution?

The main difference between TFRP and criminal prosecution is the level of consequences you could face. Criminal cases can result in imprisonment, whereas the TFRP is a financial penalty. Another big difference between the two is the taxpayer’s intent. Criminal prosecution can only take place when the taxpayer is willfully non-compliant.

How much unpaid tax triggers jail time?

Any unpaid payroll tax amount could trigger jail time if you fail to address the situation with the IRS.

What is considered “willful” in payroll tax cases?

Willfulness, according to the law, is defined as the voluntary and intentional violation of a known legal duty. In payroll tax cases, willfulness means knowingly and intentionally failing to remit payroll trust taxes to the government.

Can multiple people at a business be held liable?

Yes, it’s possible for multiple people to be responsible for the same tax liability. The IRS often investigates several people within a business, and the TFRP can be assessed against multiple responsible people. The IRS will only collect the penalty once, though.

Does hiring a payroll service protect me from liability?

No, hiring a payroll service or third-party to take care of your business taxes will not protect you from legal liability.