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Suppose that an employee A has a boss B (who is also the company owner) that deducts payroll taxes and then keeps the money and reinvests it into his company. A has complained to B about this. As a result A has had problems with trying to receive a tax refund.

The IRS now thinks that A's account has been hacked and has instructed A to appear in-person and straighten this out in order to receive refund.

Is it possible that A will be stuck paying those takes a second time if B never pays the IRS as he should?

A has paychecks and stubs for every single payday as proof. A has W-2 forms also. What do tax law and regulations say about such a case?

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  • 1
    We can't give legal advice on people's specific situations. Personally, if it were me, I would consult a lawyer or accountant, and bring them along to that meeting with the IRS. And I'd start looking for a new job. Oct 14 at 16:04
  • 3
    Congratulations, your employer is engaged in tax fraud. At this point, the IRS will figure this out whether you help them or not (so do help them). Whether the company survives is already out of your hands. It might be a good idea to search for a new job, since you might currently be ineligible for social security benefits if you need them.
    – amon
    Oct 14 at 16:06
  • By the way, a return is the document you send to the IRS declaring your income, deductions, etc. The money you get back is a refund. Fixed the question. Oct 14 at 23:24
  • @amon does "them" in "so do help them" refer to the IRS or to the employer? Also, social security is a retirement benefit; it has nothing to do with unemployment. Unemployment benefits are administered under state law, and the effect of a delinquent employer probably varies from one state to another.
    – phoog
    Oct 15 at 9:03
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I've litigated cases like these before. The IRS enforcement reaction is swift and severe.

Penalties for the employer are heavy and rarely waived. It would be rare for a business like this to stay operational long enough to issue a W-2.

A business like this would probably be shut down by the IRS and have the people responsible for the payroll function, at a minimum, promptly burdened with tax liens, within four to six months.

These cases also constitute a significant share of all criminal tax prosecutions. The odds of someone doing this spending several years in federal prison is high.

Generally speaking, if the wrongdoing is fully on the part of the employer without the collusion or knowledge of the employee, the IRS will not force the employee to double pay the taxes that should have been withheld by the employer in this situation. Instead, this IRS will try to recover the amounts that were withheld from the employees but not delivered to the IRS. It will seek to recover these amounts from the employer and also from other responsible persons in the organization (and from outsourced professionals) with the authority to pay the IRS who did not do so. There may be circumstances, if push comes to shove, where the IRS could collect from the employees in a case like this one (I've never had occasion to need to research that issue), but that would be the rare exception and not the rule, in practice.

On the other hand, if the employer simply does not withhold taxes or prepare W-2s at all, and either 1099s people who should have been classified as employees (or files no information tax returns at all), the IRS will generally insist that the employee pay income taxes on the full amount owed and that they pay the employee part of payroll taxes. It will also pursue the employer for the employer's share of payroll taxes. The employer will also be jointly and severally liable for any taxes that should have been reported and subjected to withholding that are not paid by the employee (perhaps because the employee spent all the money). Sometimes cases like this are also criminally prosecuted, but it is less common to do so.

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You didn't mention the country (but say "IRS"), but in every country that I know the inland revenue will come down on this employer like a ton of bricks. (In one country where I actually worked for them for a few months, the rule was: If you are a company and can't pay all your bills and have to decide what to pay first, employee's taxes are the absolutely highest priority. You don't pay employee's taxes, you get closed down.

If you have paychecks proving that you were paid say $30,000 in a year, and you have been told that $10,000 in taxes had been taken out of your salary, then the inland revenue will notice that they should have $10,000 in taxes paid, and it's not paid, and since the $10,000 are YOUR money and not the company's money, it's theft. Your employer can go to jail for this, and having a limited liability company won't protect them.

Bad news for you: You have to pay your taxes. In your example, the inland revenue should realise that your income wasn't $40,000 with $10,000 taxes subtracted, but you were only paid $30,000 so in the worst case you might have to pay the taxes for $30,000.

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  • Maybe a civil lawsuit against the employer to recover the amount paid, if the amount is worth it and the employer is still solvent. Oct 14 at 17:39
  • Any citations for this in US law or court decisions? It seems to me equally plausible that the employee's tax liability is satisfied when the employer withholds the tax and reports it on Form W-2, and that if the employer then fails to deposit the funds, the IRS goes after the employer directly. Oct 14 at 23:59
  • In Germany, inland revenue will go after the company first, then after the responsible people directly (like owners of a limited liability company which are not protected in this case), and finally the employee, but in that case the stolen tax is at least removed from the income so you don't pay income tax on income you never received.
    – gnasher729
    Oct 16 at 10:50

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