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When it comes to employee tax withholdings, business owners can be sentenced to jail if they aren’t careful. In July, Richard Whatley of Salt Lake City was sentenced to a maximum 51 months on federal prison for willful failure to account for payroll taxes. On top of that, he must pay $540,000.00 in restitution. This is a reduction from the original $2.3 million in employee tax withholdings that he failed to forward to the IRS.
Mr. Whatley is the former owner of three employee leasing companies. He signed the payroll checks for all of the leased employees, and over the course of five years (2001-2006), he failed to properly forward taxes that were held on the employees’ behalf to the IRS. He reached a plea agreement with prosecutors in January, pleading guilty in exchange for a sentence of 41 to 51 months in prison and reduced restitution. Judge David Nuffer sentenced him to the maximum 51 months from that agreement.
The IRS requires that business owners, officers, and directors be held responsible for unpaid taxes that were withheld (or supposed to be withheld) for the IRS, but not forwarded to them. These are trust fund taxes. The officers and directors are held responsible if they have the ability to control which debts are paid. These trust fund taxes include payroll taxes, sales tax, and certain employment taxes. On the civil side, the IRS can transfer any trust fund tax liability to any person that they feel is responsible for the unpaid debt.
Owners and officers aren’t just vulnerable to civil (monetary) liability. Like Mr. Whatley, they can be put in jail. To pursue criminal imprisonment, the IRS needs to show a willful failure to pay. In some cases, it has determined that “willful” only requires custody or responsibility of the funds. Charges of tax evasion or willful failure to account for the trust funds are felonies.
The lesson here is clear. Businesses can struggle and fail. They can even find shelter and a fresh start through bankruptcy, except for trust fund taxes. A business, its owners, and any employee with significant responsibilities cannot avoid liability for trust fund taxes. It may become a personal liability, and even a criminal one. Tax evasion and other criminal charges are a real danger any time trust fund taxes are not paid.