Tax Law Center Blog

Employment tax enforcement remains one of the highest priorities for IRS Criminal Investigation (IRS-CI) and the US Department of Justice. Business owners who fail to remit trust fund taxes often view these funds as a short-term cash flow solution during difficult financial times. However, federal law treats the failure to pay over withheld payroll taxes not as a simple debt, but as a severe criminal offense.

A recent enforcement action this month in New Jersey highlights the severe personal and criminal exposure corporate officers face when payroll tax obligations are ignored.

Factual Background

Tyrone Pitts, a resident of Lawnside, New Jersey, owned, operated, and served as president of Arline Electrical Construction Services LLC (AECS). As the sole officer exercising financial control over AECS, Pitts met the statutory definition of a “responsible person”—the individual charged with the legal duty to collect, account for, and pay over federal payroll taxes withheld from employee wages.

Between 2020 and 2023, AECS withheld federal income taxes and FICA taxes from its employees’ paychecks. However, Pitts failed to remit these withheld funds to the government and almost entirely omitted filing quarterly Form 941 (Employer’s Quarterly Federal Tax Return) filings.

Over this three-year period, the unremitted trust fund taxes accumulated to approximately $810,403. Following an investigation by IRS-CI, Pitts was charged under an information with one count of failing to collect, account for, and pay over trust fund taxes. He entered a guilty plea in federal district court, facing up to five years in prison along with statutory fines and mandatory restitution.

1. The Mechanics of Trust Fund Tax Liabilities

When a business pays its workers, it acts as a collection agent for the federal government. The funds withheld for federal income tax, Social Security, and Medicare are referred to as “trust fund” taxes because the employer holds them in statutory trust for the United States.

• 26 U.S.C. § 7202 (Criminal Liability): Section 7202 makes it a felony for any responsible person to willfully fail to collect, account for, or pay over trust fund taxes. Willfulness in this context requires establishing an intentional violation of a known legal duty, which can be proven when a business owner prioritizes other business expenses, vendor invoices, or personal draws over remitting tax deposits to the IRS.
• 26 U.S.C. § 6672 (Civil Trust Fund Recovery Penalty): Beyond criminal exposure, the IRS routinely pursues responsible officers personally under civil standards. Section 6672 allows the government to assess a 100% penalty directly against corporate officers, managers, or decision-makers. Unlike general corporate liabilities, trust fund tax assessments cannot be discharged in personal or corporate bankruptcy.

2. Why Payroll Tax Misconduct Triggers Criminal Prosecution

The IRS and DOJ view the non-payment of employment taxes far more severely than the underreporting of corporate income tax. Because trust fund monies represent employee wages that were already withheld, failing to remit these taxes is viewed by federal prosecutors as a form of conversion or theft of public revenue.

Key indicators that elevate a civil payroll tax audit to a criminal investigation include:

• Pyramiding: Continually accumulating employment tax liabilities across multiple quarters or forming new business entities to evade prior tax debts.
• Failing to File Forms 941: Intentionally omitting quarterly employment returns to conceal the underlying tax liability from automated IRS detection systems.
• Paying Other Creditors First: Demonstrating that commercial vendors, business loans, or personal expenses were paid while payroll tax obligations remained delinquent.
• Cash-in-Hand Payments: Paying employees off the books in cash to avoid generating payroll records or tax liabilities.

3. Strategic Advice for Business Owners and Practitioners

When a business encounters payroll tax arrears, swift and structured legal intervention is essential to prevent criminal referrals.

1. Prioritize Trust Fund Tax Obligations: Business owners should never use payroll tax withholdings to fund operations, overhead, or commercial suppliers. Once a business defaults on employment taxes, criminal exposure escalates rapidly.
2. Respond to IRS Notices Promptly: The receipt of an IRS Letter 1153 (Proposed Trust Fund Recovery Penalty) or an administrative summons indicates that the IRS is actively seeking to hold officers personally liable. Engaging experienced tax counsel immediately can help establish defenses or negotiate repayment arrangements before the matter escalates to IRS Criminal Investigation.
3. Explore Voluntary Disclosure Options: If a business has operated off the books, failed to file Forms 941 for multiple years, or engaged in intentional non-payment, entering the formal IRS Voluntary Disclosure Practice (VDP) may provide a structured pathway to resolve civil liabilities while mitigating the risk of criminal prosecution.

How Our Firm Can Help

Representing business owners and corporate officers in complex IRS audits, Trust Fund Recovery Penalty examinations, and criminal tax investigations requires seasoned legal strategy. Our tax controversy firm defends individuals and companies in employment tax disputes, IRS-CI investigations, and voluntary disclosures.

If your company is struggling with unfiled payroll tax returns, unpaid employment taxes, or an active IRS investigation, contact our office today to schedule a confidential consultation.