42 Months Sentence Upheld For Business Owner’s Second Employment Tax Violation

A taxpayer who willfully failed to remit federal employment taxes while in the process of pleading guilty to a nearly identical crime could not escape his above-the-guidelines sentence of 42 months’ imprisonment, the D.C. Circuit recently held.  In United States v. Jackson, the taxpayer committed bankruptcy fraud in 2002 by diverting $373,000 from the company he ran to another one of his businesses, instead of remitting the federal tax withholdings from the wages of the company’s employees.  For this crime, the district court imposed five years’ probation rather than imprisonment.  But the taxpayer did not learn his lesson.  While pleading guilty to this crime and before being sentenced in 2006, the taxpayer, from 2005 through 2009, failed to pay almost $600,000 in federal employment taxes that his other business had withheld from employee wages.  He instead used this money to pay for jewelry, clothing, furniture, and rent.  Caught again, the taxpayer pleaded guilty, this time to willful failure of paying federal employment taxes in violation of Code § 7202, which carries a fine up to $10,000 and up to five years’ imprisonment.

The Department of Justice (DOJ) signed a plea agreement with the taxpayer recommending a U.S. Sentencing Guidelines range of 27 to 33 months.  This agreement was not, however, binding on the district court.  At sentencing, DOJ emphasized that the taxpayer was being sentenced for stealing employment taxes a second time.  Accordingly, the district court imposed 42 months’ imprisonment—9 months more than the top recommended range in the plea agreement.  On appeal, the D.C. Circuit affirmed, reasoning that the taxpayer’s repeat offenses not only demonstrated willful violation of the law, but also proved that a lenient sentence was not sufficient to deter him from committing similar crimes in the future.

As we noted in a prior post, DOJ has been ramping up criminal prosecutions of employment tax violations.  In Jackson, DOJ appears to have prosecuted the case very aggressively by recommending a sentencing range that functioned as an anchor, and then pushing for a harsher sentence.  The district court and the D.C. Circuit ultimately agreed, which reflects not only the seriousness and audacity of the taxpayer’s repeat offenses, but also the principle that using employment taxes held in trust for the government constitutes theft.  This principle is especially noteworthy for businesses that use trust fund taxes to pay other creditors when in dire financial straits, as this practice may now lead to not only civil liability, but also criminal prosecution for those making the decision to divert the funds.  Employers are well served to recognize that trust fund taxes are not their money.

IRS Extends Deadline for Furnishing ACA Statements to Individuals And Good-Faith Transition Relief

Today, the IRS in Notice 2016-70 extended the deadline for certain 2016 information reporting requirements under the Affordable Care Act (ACA), as employers and other coverage providers prepare for their second year of ACA reporting.   Specifically, providers of minimum essential coverage under Code section 6055 and applicable large employers under Code section 6056 will have until March 2, 2017—not January 31, 2017—to furnish to individuals the 2016 Form 1095-B (Health Coverage) and the 2016 Form 1095-C (Employer-Provided Health Insurance Offer and Coverage).  Because this extended deadline is available, the normal automatic and permissive 30-day extensions of time for furnishing ACA forms will not apply on top of the extended deadline.  Additionally, the Notice extended good-faith transition relief from penalties under Code sections 6721 and 6722 to 2016 ACA information reporting.

Filers should note that, unlike Notice 2016-4, which extended the deadlines for both furnishing to individual taxpayers and filing with the IRS the 2015 ACA forms, Notice 2016-70 did not extend the deadline for filing with the IRS the 2016 Forms 1094-B, 1095-B, 1094-C, and 1095-C—and this deadline remains to be February 28, 2017 (or March 31, 2017, if filing electronically).  Filers may apply for automatic extensions for filing ACA forms by submitting a Form 8809 and seek additional permissive extensions.  Late filers should still furnish and file ACA forms as soon as possible because the IRS will take into account this timing when determining whether to abate penalties for reasonable cause.

The extended furnishing deadline means that some individual taxpayers will not have received a Form 1095-B or Form 1095-C by the time they are ready to file their 2016 tax return.  The Notice provides that these taxpayers need not wait to receive these forms before filing their returns.  Instead, taxpayers may rely on other information received from their employer or other coverage provider for filing purposes, including determining the taxpayers’ eligibility for the premium tax credit and confirming that they received minimum essential coverage.

Notice 2016-70 also extended the good-faith transition relief for 2016 returns.  Specifically, filers that can show that they made good-faith efforts to comply with the ACA reporting requirements for 2016 are not subject to penalties under Code sections 6721 (penalties for late, incomplete, or incorrect filing with IRS) and 6722 (penalties for late, incomplete, or incorrect furnishing of statement to individual taxpayers).  This relief would apply to missing and inaccurate TINs and dates of birth, and other information required on the ACA form.  It does not apply where a filer does not make a good-faith effort to comply with the regulations or where the filer failed to file or furnish by the applicable deadlines.

Earlier Deadline for Filing Forms W-2 and 1099-MISC Looms

The earlier filing deadline for the Form W-2 and a Form 1099-MISC that reports nonemployee compensation (Box 7) is fast approaching.  In prior years, electronic filers had until as late as March 31 to file copies of such forms with the IRS (or the Social Security Administration (SSA), in the case of Forms W-2).  Additionally, filers could request an automatic extension to push the deadline back another 30 days.  Many large filers requested automatic extensions in the normal course to provide extra time to clean up their filings and avoid penalties.  For 2016, however, Forms W-2 and Forms 1099-MISC reporting nonemployee compensation in Box 7 are required to be filed by January 31, 2017–the deadline for furnishing copies to recipients–regardless of whether they are filed electronically or on paper.

Section 201 of the Protecting Americans from Tax Hikes (PATH) Act, enacted last December, accelerated the filing deadlines to combat identity theft and fraudulent claims for refund.  In past years, the IRS often issued refunds to taxpayers well before filers were required to file copies of the Form W-2 with the SSA and copies of the Form 1099-MISC reporting nonemployee compensation with the IRS.  Because the IRS had to process certain tax returns and refund claims without having all of the third-party payor information, the process was susceptible to fraudulent returns claiming refunds.  The new January 31 deadline makes the payor information available to the IRS sooner, thus reducing the potential for fraud.  This change comes on top of temporary Treasury Regulations issued last year that eliminated the automatic 30-day extension for Forms W-2 and proposed Treasury Regulations that would eliminate the same extension for other information returns, including Forms 1099-MISC, when effective.  Because the proposed regulations are intended to take effect sometime after the filing of 2016 information returns, they will not affect the availability of the automatic 30-day extension for 2016 information returns.

Although the earlier deadline and elimination of automatic extensions address valid concerns, the new rules inevitably increase the risk of penalties for erroneous information returns under section 6721 of the Code.  Combined with the increased penalty rates adopted as part of the Trade Preferences Extension Act of 2015 (see prior coverage) and subsequent inflation adjustment, the new deadlines increase the risk of large penalties, particularly for large filers.  For example, many employers with large expatriate workforces use the first quarter of the year to perform tax equalization calculations and prepare tax returns for their overseas workers.  That process often results in adjustments to the Form W-2 that could previously be made before filing the forms with the SSA.  Now, those same adjustments may well result in penalties.  Although the filing of corrected Forms W-2 have not consistently attracted the automatic information reporting penalties that corrections of other information returns have historically attracted, the changes to the filing deadlines and the statutory penalty rates create cause for concern.

Given the earlier deadlines, filers should take steps now to prepare for the 2017 filing season.  For example, lining up outside vendors to prepare and print recipient copies of returns earlier in January will provide recipients with some time before the January 31 filing deadline to identify potential errors and request corrections.  Many filers have traditionally waited until late January to print and send recipient copies knowing that they had time to make corrections before the filing deadline.  That strategy is no longer prudent in the face of simultaneous IRS/SSA filing and recipient copy deadlines.  To that end, large filers should notify the departments making the payments of the earlier deadline, and instruct them to provide required information with sufficient lead time to allow for processing of the data to prepare information returns for review and timely filing.  Filers should consider setting deadlines for transmitting payment data internally early in January to allow for the earlier distribution of recipient copies.

In addition, filers of Forms 1099-MISC reporting nonemployee compensation in Box 7 should submit a Form 8809 requesting an automatic 30-day extension in January 2017 to extend the filing deadline until March 2.  This extension will provide some additional time to identify errors and make corrections before the returns are filed.  Filers who believe that a non-automatic 30-day extension is warranted for Forms W-2 should be forewarned that the IRS will only grant such an extension in extraordinary circumstances, such as a natural disaster or a fire that destroys the filer’s books and records.