Latest Facts & News 

• IRS Criminal Investigation Division reported 363 tax fraud cases in fiscal year 2023, with average sentences of 16 months
• Payroll Tax enforcement is a priority for the IRS. According to the Bi-Partisan Policy, the Payroll Tax Revenue for the fiscal year ending in 2024 represented 35% of total revenue collected by the IRS.
• Federal payroll tax compliance violations can expose employers to substantial penalties and criminal charges
• Tax evasion convictions can result in up to 5 years imprisonment and fines up to $100,000 for individuals
• The U.S. tax gap approaches $700 million, leading to increased IRS enforcement actions

Payroll tax fraud is one of the most serious financial crimes the IRS goes after. What might seem like a minor mistake, such as paying workers as contractors or missing a deposit deadline, can quickly escalate into a full federal investigation. The IRS considers unpaid payroll taxes to be money stolen from the government. That means even honest business owners can end up facing criminal charges, losing their assets, or being held personally responsible under a provision known as the Trust Fund Recovery Penalty.

In moments like these, a payroll tax fraud attorney isn’t just helpful; they’re critical. From the first sign of trouble, the right legal guidance can protect your rights, manage the IRS’s aggressive tactics, and help you avoid criminal exposure.

Read along to learn how these cases unfold, what the IRS looks for, and how an experienced attorney can help you take control before it’s too late.

Understanding Payroll Tax Fraud

Payroll tax fraud is a serious federal offense that occurs when a business or individual intentionally fails to pay payroll taxes owed to the government. These taxes include amounts withheld from employee wages for federal income tax, Social Security, and Medicare. Employers are legally required to collect and remit these taxes to the IRS.

To better understand this, let’s examine what the law requires, the actions that constitute payroll tax fraud, and the differences between civil penalties and criminal charges.

Elements of Payroll Tax Fraud Under Federal Law

To prove payroll tax fraud in court, the government must show three things. Here’s what each element means:

Element	What It Means
Duty	The person was responsible for collecting and paying payroll taxes to the government.
Failure	The person did not collect or pay those taxes as required by law.
Willfulness	The person made this choice on purpose, not by accident or mistake.

Anyone who controls payroll and chooses to break these rules can be held personally responsible.

Common Payroll Tax Fraud Scenarios

Some of the most frequent ways payroll tax fraud occurs include:

• Misclassifying employees as independent contractors: This avoids payroll taxes and employee benefits.
• Paying workers off-the-books (in cash): Not reporting these payments to the IRS, skipping tax withholding.
• Falsifying payroll records: Creating fake employees (phantom workers), inflating hours, or altering pay rates to steal funds or reduce taxes.
• Not remitting withheld taxes: Withholding taxes from employee paychecks but not sending them to the IRS.
• Filing false payroll tax returns: Submitting incorrect information on forms like IRS Form 941 constitutes fraud.
• Claiming fake payroll tax credits or deductions: Trying to get refunds or lower tax bills using credits you don’t qualify for.

Difference Between Civil Penalties and Criminal Charges

When the IRS identifies payroll tax issues, it can pursue two paths: civil penalties or criminal charges.

Civil Penalties	Criminal Charges
For mistakes or carelessness	For actions done on purpose
Result in fines and extra payments	Can lead to jail, probation, and big fines
Lower proof is needed for the IRS	Higher proof needed: must show intent
No criminal record	Results in a criminal record
Handled by IRS agents	Handled by criminal investigators and courts

If you’re facing payroll tax fraud charges, Verni Tax Law is here to help. Our dual-licensed payroll tax fraud attorney knows how to handle both tax and legal issues. We’ll explain your options, defend your case, and work to protect your future. Getting help early can make a big difference.

Can You Go to Jail for Tax Fraud? Criminal Penalties and Sentences

Yes, you can face jail time for payroll tax fraud. The government takes these crimes very seriously. If you are found guilty of payroll tax fraud, you could face prison time, hefty fines, and other penalties. The exact punishment depends on the details of your case, but the law allows for severe consequences.

Maximum Penalties for Payroll Tax Fraud

If you are convicted of payroll tax fraud under federal law, you could face:

• Up to 5 years in federal prison for each count of fraud
• Fines up to $100,000 for individuals and up to $500,000 for corporations
• Orders to pay back the taxes you owe (restitution), plus interest and penalties

Most people convicted of tax fraud do receive prison time. In recent years, over 60% of tax fraud offenders have been sentenced to jail, with an average sentence of approximately 16 months.

Federal Sentencing Guidelines for Tax Crimes

Federal judges use special rules, known as the tax fraud sentencing guidelines, to determine the length of incarceration for individuals convicted of payroll tax fraud. These guidelines help make sure sentences are fair and consistent across similar cases.

The most important factor is the amount of tax loss, which is the amount of tax the government lost due to the fraud. The more money involved, the higher the possible sentence.

How do the Guidelines Work?

• The judge begins by examining the total tax loss.
• The guidelines establish a “base offense level” that increases as the tax loss amount rises.
• Other details, called “adjustments,” can raise or lower the sentence. These include things like:
  • If the fraud was planned or used complicated methods to hide what was happening (“sophisticated means”)
  • If the person was a leader or organizer of the fraud
  • If the person has a past criminal record

What Else Can Affect the Sentence?

• If the person admits guilt early and cooperates with the investigation, the judge may lower the sentence.
• If the person attempts to conceal evidence, lies to investigators, or has a history of doing so, the judge can increase the sentence.
• The judge also looks at the person’s role in the fraud. Leading or organizing the crime usually means a longer sentence.

The guidelines provide judges with a range to choose from, but judges can also deviate from that range for special reasons. Every case is different, but these rules establish the starting point for determining the potential sentence for payroll tax fraud.

Factors That Increase or Decrease Sentences

Several factors can make a sentence longer or shorter:

What can increase a sentence?

• Obstructing the investigation or lying to authorities
• Repeating the same crime multiple times
• Acting as the leader or organizer of the fraud
• Using fake documents or hiding money in complicated ways

What can reduce a sentence?

• Cooperating with investigators or helping recover the lost taxes
• Admitting guilt early and accepting responsibility
• Having no previous criminal record

Judges consider all these details before deciding how long someone should serve in jail or how much they should pay in fines. The more serious or repeated the fraud, the harsher the sentence is likely to be. If the person is honest, helps fix the problem, or has never been in trouble before, the judge may give a lighter sentence.

IRS Criminal Investigation Process for Payroll Tax Fraud

The IRS Criminal Investigation Division (IRS-CI) is responsible for investigating payroll tax fraud. This process is serious and can result in criminal charges, fines, and even imprisonment. Understanding how the IRS investigates, the warning signs, what happens with a grand jury, and your rights can help you protect yourself if you are ever under scrutiny.

How Does the IRS Handle Payroll Tax Cases?

A payroll tax issue doesn’t stay a simple compliance matter for long. Once the IRS gets involved, it follows a clear sequence to find out who is responsible, whether the law was knowingly broken, and what penalties or actions should follow.

Knowing how this unfolds can help business owners see how quickly things can escalate and why early action is critical.

1. Withholding and reporting: The business withholds federal income tax, Social Security, and Medicare from employee wages, accounts for these amounts, files quarterly payroll tax returns, and sends the withheld funds to the IRS.
2. Failure to comply: The business does not pay the payroll taxes and/or fails to file the required payroll tax returns.
3. Identifying the responsible person: The IRS determines who had the authority to collect, account for, and pay over the payroll taxes.
4. Reviewing noncompliance: The IRS checks whether the responsible person failed to file the payroll tax returns and failed to remit the withheld taxes.
5. Assessing willfulness: The IRS decides whether the failure was willful, meaning the person knew the taxes were due and deliberately chose not to pay.
6. Applying Section 6672 penalty: If both conditions are met—being the responsible person and acting willfully—the IRS may impose the Trust Fund Recovery Penalty, making the individual personally liable for 100% of the unpaid trust fund taxes.
7. Considering criminal referral: In severe cases, the IRS agent may refer the matter to the Criminal Investigation Division (CI) for potential prosecution.

IRS Payroll Interview: How It Usually Starts

When the IRS wants to figure out who’s responsible for unpaid payroll taxes, they don’t just rely on records. They call you in. This is something most business owners don’t see coming, and answering incorrectly can get you into serious trouble. Here’s what that process looks like.

1. You get a notice about a payroll tax examination: It might look routine, but it’s their way of letting you know they’ve found something worth digging into. It usually means they want to ask more questions in person.
2. They ask you to come in for an interview: You’re called to the IRS office to meet with an agent. It’s not just a friendly chat; they want to know what role you played in handling payroll and tax payments.
3. They use Form 4180 to guide the questions. This form helps the agent determine if you were responsible for ensuring taxes were paid and if you chose not to. It goes over decision-making, check signing, and what you knew when taxes weren’t sent in.
4. The questions are built to get key admissions: The agent may not say it, but some questions are meant to make you admit things that help them build a case. They can use your answers to hit you with the Trust Fund Recovery Penalty, or even worse, refer the case for criminal charges.
5. These interviews are sometimes used in criminal cases: What you say here doesn’t stay in the room. If the IRS decides you acted willfully, your own words from this interview might be used later in a criminal investigation or prosecution.

Signs You’re Under Criminal Investigation

You might not always know right away if the IRS is investigating you for payroll tax fraud. However, there are clear warning signs that can alert you to a possible criminal investigation:

• IRS special agents (not regular auditors) contact you in person or by phone, often showing a badge and sometimes reading you your rights.
• You receive a subpoena for bank records, business documents, or tax records, either directly or through your bank or accountant.
• The IRS suddenly stops communicating with you during a civil audit, or the audit is put on hold without explanation.
• Your accountant or other third parties are contacted by the IRS and asked to provide information or appear before a grand jury.
• The IRS asks detailed questions about specific transactions or requests a large amount of documentation.
• You notice that more than one IRS agent is involved in your case, or meetings include attorneys from the IRS or the Department of Justice.

If you notice any of these signs, contact a qualified payroll tax fraud attorney immediately. Anything you say can be used against you, and your attorney can help protect your rights.

Grand Jury Proceedings and Indictment Process

If the IRS collects sufficient evidence, your case may be referred to a federal grand jury. Here’s what happens:

• A grand jury is a group of citizens who review evidence in secret to decide if there is enough proof for criminal charges.
• IRS special agents and federal prosecutors present documents, witness testimony, and other evidence to the grand jury.
• Grand jury proceedings are confidential. Witnesses, including accountants or business partners, may be called to testify, and all information is kept secret by law.
• If the grand jury believes there is enough evidence, it issues an indictment. This is a formal charge that starts the criminal court process.

Being indicted by a grand jury is a serious matter. If you receive a subpoena or are asked to testify, do not go alone; always consult your payroll tax fraud attorney first.

Your Rights During a Federal Tax Investigation

You have certain rights when under criminal investigation by the IRS:

• Right to remain silent: Do not answer questions that can incriminate you. Anything you say can be and will be used against you.
• Right to counsel: Always have, or insist on having, an attorney present during questioning or meetings with IRS agents.
• Right to privacy and confidentiality: The IRS should respect taxpayer privacy; the IRS cannot reveal your information unless you give permission or if it’s required by law.
• Right to be informed: You have the right to know what the IRS does and why, with full disclosure and explanation regarding your case.
• Right to challenge the IRS: It is within your power to appeal an IRS decision and provide your own version of events.

Always hold these rights whenever you feel you are under investigation; the sooner you act, the better your outcome will usually be.

Payroll Tax Fraud Defense Strategies and Legal Options

If you face payroll tax fraud allegations, you have criminal tax investigation defense strategies and legal options. These can help reduce penalties, avoid jail time, or even get charges dropped. Here’s what you need to know.

Challenging Willful Intent in Tax Fraud Cases

The government must prove that you acted willfully to convict you of payroll tax fraud. This means they must show you intentionally broke the law. 

Defense lawyers often challenge this by arguing:

• Mistakes or misunderstandings: You made an honest error on payroll taxes or misunderstood tax rules.
• Reliance on professionals: You trusted a tax preparer, accountant, or lawyer who gave bad advice or made errors.
• Lack of control: You weren’t responsible for payroll decisions, or didn’t know that taxes weren’t paid.

If your lawyer can show your actions weren’t intentional, the criminal charges may be reduced or dismissed.

Negotiating with Federal Prosecutors

In many cases, your lawyer can negotiate with prosecutors to avoid trial or reduce penalties. This includes:

• Plea bargains: Agreeing to plead guilty to a lesser charge (like negligence instead of fraud) to avoid jail time.
• Settlements: Offering to pay back taxes, penalties, and interest in exchange for dropping criminal charges.
• Cooperation deals: Providing information about others involved in exchange for leniency.

These negotiations require experienced lawyers who understand IRS procedures and federal sentencing rules.

Pre-Indictment Intervention Strategies

Acting before criminal charges are filed gives you the best chance to avoid jail. Strategies include:

• Voluntary disclosure program: Telling the IRS about unpaid taxes before they investigate you. This often results in civil penalties rather than criminal charges.
• Correcting errors: Filing amended tax returns and paying what you owe quickly.
• Proving compliance: Showing you’ve fixed payroll processes and now follow tax laws.

Early action can prevent an investigation from escalating into a criminal case. If you suspect the IRS is looking into your payroll taxes, contact a lawyer immediately.

Key Takeaways Willfulness is the most challenging part for prosecutors to prove; use this to your advantage. Negotiation is a common practice in tax fraud cases and often yields better outcomes than a trial. Don’t wait for charges; act early if you think you’re under investigation.

These strategies depend on having a lawyer who specializes in tax crimes. They know how to protect your rights and conduct IRS investigations.

Business Owner Protection in Payroll Tax Fraud Cases

If you own or manage a business, facing allegations of payroll tax fraud can put both your company and your personal finances at risk. The IRS takes these cases seriously and can hold business owners personally responsible for unpaid payroll taxes, even if you run a corporation or LLC. Let’s break down what this means for you and how you can protect yourself and your business.

Personal Liability for Corporate Payroll Tax Fraud

It’s a common misconception that forming a corporation or LLC always shields business owners from personal liability for payroll tax issues. In reality, the IRS can hold you personally liable if you control payroll decisions and taxes aren’t paid.

A “responsible person” is anyone with the duty and authority to collect, account for, and pay over trust fund taxes. This is not limited to owners; it can include officers, managers, bookkeepers, or any individual who has significant control over financial decisions. The IRS focuses on who actually has the power to decide whether taxes get paid, not just on job titles.

• You may be personally liable if you:
  • Decide which bills get paid
  • Sign company checks
  • Oversee payroll or tax payments
• If the IRS finds you willfully failed to pay payroll taxes, they can collect the full amount from your personal assets, even if the business closes or files for bankruptcy.

Trust Fund Recovery Penalty and Criminal Charges

Suppose payroll taxes withheld from employees’ paychecks aren’t sent to the IRS. In that case, the agency can use the Trust Fund Recovery Penalty (TFRP) to collect the money directly from responsible individuals, not just the business.

• “Trust fund” taxes are the amounts withheld for federal income tax, Social Security, and Medicare.
• The TFRP can be assessed against anyone who willfully fails to pay these taxes.
• The penalty equals 100% of the unpaid trust fund taxes, plus interest.
• The IRS can hold more than one person liable, and each can be held responsible for the full amount.

For the Trust Fund Recovery Penalty to apply, the IRS must also prove the failure was willful, meaning the responsible person knew the taxes were due and consciously chose not to pay them. Willfulness can be shown through: 

• Repeated missed deposits.
• Paying other creditors before the IRS.
• Using withheld trust fund taxes for business or personal expenses.
• Ignoring clear signs that taxes were not being paid.
• Acting with reckless disregard, such as continuing to pay wages while knowing there were no funds for the tax deposits.

In some cases, a taxpayer may challenge willfulness by showing they made reasonable efforts to pay, such as attempting to secure financing, or that they lacked authority over payment decisions. Demonstrating genuine unawareness that taxes were unpaid can also be used as a defense. 

While not a legal element, the magnitude of the unpaid taxes can influence how aggressively the IRS pursues a case. Larger amounts may increase the likelihood of a criminal referral. If the IRS believes the nonpayment was intentional and serious, it may refer the matter to the Criminal Investigation Division (CI), where prosecutors will weigh the evidence of willfulness in deciding whether to file criminal charges.

👉 Employment tax audits are on the rise, and the IRS often uses them to uncover serious red flags like misclassified workers or unpaid withholdings that can lead to Section 6672 penalties or even criminal charges.

See What The IRS Looks for in These Audits Employment Tax Audits On The Rise Section 6672 Penalty And Criminal Prosecution

Protecting Business Operations During Investigation

If your business is under investigation for payroll tax fraud, take these steps to protect your operations and yourself:

• Respond to all IRS notices on time. Missing deadlines can make things worse.
• Gather and organize payroll and tax records. Good records show you are trying to comply.
• Review your payroll and tax processes. Fix any errors right away.
• Never speak to IRS investigators alone. Always have a tax fraud attorney or advisor with you.
• Keep your business running. Assign backup roles for payroll and finances to avoid disruptions.

Work with professionals; a tax payroll tax fraud attorney can help you respond to the IRS, protect your rights, and negotiate solutions that may prevent criminal charges or business shutdowns.

Case StudyFlorida Payroll Services Owner Sentenced for $20 Million Payroll Tax Fraud (2025) In April 2025, Matthew Brown, owner of Elite Payroll in Palm Beach Gardens, Florida, was sentenced to 50 months in federal prison for payroll tax fraud. What Happened → Matthew Brown operated Elite Payroll, a payroll services company serving small businesses across St. Lucie, Martin, and Palm Beach Counties. His clients trusted him to collect payroll taxes, federal income tax, Social Security, and Medicare from their employees’ wages and pay those funds to the IRS each quarter. Instead, between 2014 and 2022, Brown kept more than $20 million in payroll taxes for himself. He charged his clients the full amount of their tax liabilities, but then filed false tax returns with the IRS that underreported the actual amount owed. For example, in one quarter, a client owed about $219,000 in payroll taxes. Brown collected this full amount but reported to the IRS that only $32,000 was owed and paid that smaller amount, pocketing the difference. Legal Outcome → Federal prosecutors charged Brown with not paying taxes withheld from employees’ wages and filing a false tax return. After court proceedings, he was sentenced in April 2025 to 50 months in prison for his role in the scheme. Why This Matters? This case illustrates the seriousness with which the IRS and federal courts approach payroll tax fraud, even when a third-party payroll provider is involved. It also highlights the importance for business owners to verify that payroll taxes are actually being paid to the IRS, even when using an outside service.

Immediate Steps to Take If Facing Payroll Tax Fraud Allegations

If you find yourself facing allegations of payroll tax fraud, acting quickly and carefully is essential. The proper steps now can protect your rights, your business, and your future.

What to Do If Contacted by IRS Criminal Investigation

If IRS Criminal Investigation (CI) special agents contact you, take the situation seriously. Their job is to build criminal cases, not just collect taxes. Here’s what you should do:

• Stay calm and avoid answering questions about your taxes or business practices.
• Do not try to explain or defend yourself on the spot.
• Politely ask for the agents’ names and contact information.
• Inform them that you wish to speak with a payroll tax fraud attorney before answering any questions.

Document Preservation and Evidence Protection

Protecting your records is crucial during an investigation. The IRS will review your business documents, payroll records, and communications. Here’s how to prepare:

• Gather and organize all payroll, tax, and financial records.
• Do not destroy, hide, or alter any documents, as this may result in additional charges.
• Make backup copies of essential files.
• Keep all correspondence from the IRS in a safe place.
• Share documents only with your attorney or trusted advisors.

Coordinating with Other Professional Advisors

You may need to work with more than just a lawyer. Accountants, payroll providers, and other advisors can play a key role:

• Let your accountant and payroll provider know about the investigation, but do not discuss details without your attorney present.
• Work with your attorney to coordinate responses and gather needed information.
• Make sure everyone follows your attorney’s instructions to avoid mistakes or misunderstandings.

Protecting Your Future from Federal Tax Fraud Charges

Dealing with payroll tax fraud charges is stressful and can put everything you’ve built at risk. The IRS treats these cases seriously, and the rules are strict. You need answers and a plan that fits your situation, not just general advice.

Verni Tax Law specializes in assisting business owners and individuals who are facing payroll tax fraud investigations or charges. With experience handling IRS Criminal Investigation Division matters and defending clients in federal court, you get guidance that is practical and based on real results. You will always know where your case stands, what your options are, and the following steps to take.

If you’re worried about payroll tax problems or have already heard from the IRS, acting quickly is your best move. Early help can make a significant difference, whether it’s protecting your business, finances, or reputation.

If you want clear answers and a defense that fits your needs, contact Verni Tax Law. Get the support you need to move forward with confidence.

FAQs

1. How long can you go to jail for payroll tax fraud?

If you are convicted of payroll tax fraud, you can face up to five years in federal prison for each count of fraud. Most people found guilty do receive jail time. In recent years, over 60% of tax fraud offenders were sentenced to prison, with the average sentence being about 16 months. The exact length depends on how much tax was involved and other details of your case.

2. What’s the difference between payroll tax fraud and tax evasion?

Knowing the difference between payroll tax fraud and tax evasion can help you understand what kind of investigation or penalties you might face. It also helps you see whether your situation is about payroll-specific issues or broader tax problems.

Payroll Tax Fraud	Tax Evasion
When an employer or business owner purposely does not pay payroll taxes owed to the government. Examples include not sending withheld taxes from employee paychecks, paying workers off the books, or misclassifying workers.	A broader term for any illegal way of avoiding taxes. This includes hiding income, falsifying records, or using offshore accounts. Payroll tax fraud is one type of tax evasion, but not all tax evasion is payroll tax fraud.

3. Can the IRS press criminal charges for honest mistakes in payroll taxes?

No, the IRS does not press criminal charges for honest mistakes or simple errors. Criminal charges require proof that you intentionally tried to avoid paying taxes. If you made a mistake or were careless, you might face civil penalties (like fines), but not jail time. Only willful actions, done on purpose to cheat the system, lead to criminal charges.

4. How does the IRS decide whether to pursue criminal charges vs. civil penalties? 

The IRS looks at your intent. If you made a mistake or were negligent, they usually issue civil penalties (fines, interest, and extra payments). Suppose they find that you acted intentionally, such as hiding income, lying on tax returns, or failing to pay taxes withheld. In that case, they may pursue criminal charges, which can result in jail time and a criminal record. The IRS requires more substantial evidence for criminal cases and typically reserves them for serious or repeated violations.

5. What happens to my business if I’m charged with payroll tax fraud?

If your business is charged with payroll tax fraud, you could face serious legal and financial consequences:

• The IRS can freeze your business bank accounts.
• They may seize business assets or put liens on property.
• You and others in charge of payroll can be held personally responsible, even if you have a corporation or LLC.
• Your personal money and property could be at risk.
• Your business reputation can suffer, and you may lose customers or partners.
• High penalties and legal costs can even force the business to close.

For the best chance to protect your business and limit the damage, contact Verni Tax Law as soon as possible.