The majority of individuals do not even have an opportunity to evade paying their federal income and withholding taxes. This is because most people work in salaried or hourly positions where taxes are automatically withheld from their paychecks. The employer, not the employee, is the person who actually pays employees’ taxes. Employers are required to withhold federal income tax as well as Social Security and Medicare taxes. In addition to withholding taxes from employee paychecks, employers are required to match the employee’s Social Security and Medicare contributions. Employers are required to pay both their share of payroll taxes as well as the employee’s share that they have withheld. The employer must also report this income and the taxes paid on a quarterly basis to the IRS.
When the IRS sends a summons for failing to pay withholding taxes, the employer — not the employee — is typically the target of the IRS investigation. Employers have developed varying levels of sophisticated schemes to evade paying taxes and conceal their non-payment. For example, employers and employees alike evade paying withholding taxes through cash transactions. When employees are paid in cash, taxes are almost never withheld. Through cash payments, employers and employees avoid maintaining any records of payments made and the taxes owed. While some employees may be fans of cash payments, this practice exposes both the employer and the employee to criminal penalties for tax evasion.
An employer may also decide that he wants to evade payment of taxes without sharing any of the illicit benefits with employees. These employers will pay employees and withhold taxes while failing to make the required payments to the federal government. They will either fail to file statements with the IRS or submit fraudulent statements. To further conceal and support this scheme, some use a scheme the IRS has labeled as “pyramiding.” The initial step in this scheme is straightforward: the business simply fails to pay taxes after withholding them from the employee’s paychecks. The business subsequently files for bankruptcy to discharge debts, including taxes owed. The owners then create a new business under a different name and continue to fail to pay taxes.
Another scheme is known as “employee leasing.” This involves contracting with outside agencies to handle the various human resources concerns for employees, including payroll. This of course, is perfectly legal. The law is broken is when, like the businesses involved in pyramiding schemes, these outside businesses fail to pay to the federal government taxes that are withheld from employee paychecks. Then, the company dissolves, leaving debts and taxes unpaid. The outside business was a sham entity all along used to evade paying taxes.
The IRS prosecutes approximately 100 of these schemes every year and obtains convictions resulting in jail time in more than 80 percent of the cases. The average sentence is approximately two years. Given that these schemes invariably involve third parties who are either totally innocent or otherwise unreliable accomplices, the IRS’s success in prosecuting these crimes should not be surprising.