All businesses realize that they have to pay attention to the US Department of Labor, in things like the Fair Labor Standards Act and OSHA, and to the EEOC, in areas such as discrimination. Every business also realizes that the IRS also pays attention to their activities. But did you know that the Department of Justice pays attention as well and they are the ones that can put you in prison?
Avoiding employment taxes
Many businesses, especially small businesses, have occasional cash flow issues. As a result most businesses have a line of credit with their local banks in order to tide themselves over in order to pay wages during cash flow short falls. Occasionally one of these businesses decides to operate differently. Rather than taking a short term loan from the bank they decide to take the loan from the Federal government, without the government’s consent. They do this by taking taxes from the employees’ paychecks but never send it to the government, pocketing the money. These reasons may be varied from just poor financial management to nefarious reasons.
Payback and jail
Regardless of the reason the Federal government is not happy when this happens, as in the case of Distributive Networks LLC. According to a press release from the US Department of Justice, Kevin Bertram, who ran Distributive Networks, pleaded guilty to willfully failing to pay more than $900,000 in employment taxes. Specifically he “failed to file IRS Forms 941 (Employer’s Quarterly Federal Tax Returns) and failed to pay $927,922 in employment taxes that he had withheld from his employees’ wages. These taxes included federal income, social security and Medicare taxes that the company was required to withhold from its employees’ wages, as well as the company’s portion of social security and Medicare taxes.”
As a result of this failure Bertram has to pay back this money to the IRS and pay a fine of up to $250,000. He will also spend up to five years in a federal “Gray bar hotel.”
The lesson in this is that not paying taxes is not a wise business strategy, rather it is the road to ruin, regardless of the reasons.
Special thanks to David Gair of Gray Reed & McGraw, P.C. for the inspiration of this post.