In a lawsuit filed by not-for-profit corporations serving Latino immigrants against the U.S. Secretary of the Treasury and IRS, court filings have revealed that the IRS and U.S. Department of Homeland Security (DHS), acting on behalf of U.S. Immigration and Customs Enforcement (ICE), have entered into a memorandum of understanding (MOU) in which the IRS will disclose to ICE the names of addresses of certain taxpayers (taxpayer information) with Individual Taxpayer Identification Numbers (ITINs) for the purpose of aiding in the enforcement of immigration laws. This historic and unprecedented MOU has implications not only for immigration enforcement against undocumented persons and their employers but also for related tax enforcement against those same employers.
Historically, tax crimes can be difficult to prosecute, given complexities relating to mental state, the law and evidence. However, payroll tax-related crimes have been a general exception to this rule – particularly with cash-under-the-table schemes – because the relevant tax laws are relatively straightforward, the forensic evidence tends to be simple, there are typically many witnesses available to the government, employers often harbor double-books, and the average juror understands the prosecution theory.
A criminal payroll tax case against employers can become even more attractive for the government if the workers are undocumented. Undocumented workers might be kept off of the company's books or otherwise receive "special treatment" in regards to their onboarding. Or they ostensibly might be "on the books" but in fact, with the knowledge or willful blindness of the employer, they are using false identifications to obtain employment. There are myriad potential fact patterns, but the bottom line is that prosecutors can leverage the presence of undocumented workers in many ways, including by easily pressuring the workers to testify, compiling more clear-cut evidence of criminal intent, seeking higher prison sentences than would occur in a "traditional" or "pure" tax case, pursuing wire fraud and mail fraud charges supporting forfeiture, and emphasizing the jury appeal generated by immigration issues.
Even if a payroll tax case does not become criminal, civil penalties relating to payroll noncompliance issues quickly can become steep. If an employer is not facing investigation or prosecution, it may realize that it has historical tax compliance issues. These issues can become thorny, because an employer can face the question of how to attain current and future compliance in light of ongoing tax filing requirements while also having to determine how to handle prior tax filings that may have been inaccurate. The potential use of false identities by undocumented workers complicates all of this.
The MOU
The Internal Revenue Code (IRC) imposes strict limitations on the ability of the IRS to share taxpayer information. Condensing, the MOU states that the IRS can share taxpayer information with ICE under IRC Section 6103(i)(2)(A), which provides that the IRS should provide taxpayer information to a requesting agency 1) that is preparing for a criminal proceeding, 2) when an investigation may result in a proceeding or 3) during federal grand jury proceedings. The requesting agency must make a request that includes the taxpayer's name and address, relevant taxable periods, statutory authority for the criminal investigation and reasons why the taxpayer information is relevant to the investigation.
There are other requirements as well, but the main point is that Section 6103(i)(2)(A) is not intended to authorize general, wholesale disclosures of information about entire classes of taxpayers. The request and the disclosure must be specific, and that is exactly the interpretation of Section 6103(i)(2)(A) taken by the government when arguing to dismiss the plaintiffs' complaint and oppose the motion for preliminary injunction: The MOU is limited and targeted and permits the lawful exchange of information only for those taxpayers who are under criminal investigation or subject to a criminal proceeding.
It remains to be seen how broadly the MOU is actually applied going forward as a practical, real-world matter by the IRS and ICE. But, at least in certain circumstances, ICE will receive identifying – and location – information regarding persons who are perceived to be working and living in the U.S. in violation of the criminal law.
Focus on Payroll Enforcement
Although the MOU is important, the government has made clear its intent to focus on undocumented workers, regardless of information shared through the MOU. Enforcement in this area of overlapping tax and immigration issues can occur in many forms, including workplace sweeps, audits, administrative requests and even grand jury subpoenas and investigations. These cases also can expand easily beyond "just" immigration and tax charges.
A recent example illustrates the point. In a criminal case brought in the U.S. District Court for the Middle District of Florida, three owners and operators of a construction company were indicted for and pleaded guilty to committing related schemes centered on the company's payroll.
According to a U.S. Department of Justice (DOJ) press release, "the defendants engaged in a scheme to defraud involving misrepresentations concerning workers' compensation insurance. The purposes of the scheme were to facilitate the employment of workers who were not legally authorized to work in the United States, to avoid paying for adequate workers' compensation insurance, and to avoid paying required payroll taxes." Allegedly, the defendants' scheme caused a tax payroll loss of almost $37 million and a loss to the insurance companies of almost $13 million.
The case reflects that when payroll records and tax filings are not accurate, the government can charge criminal offenses involving alleged victims other than the IRS because many reporting obligations simultaneously flow from a company's payroll. This tactic increases the government's leverage in regards to trial calculations, potential sentencing, and restitution and forfeiture obligations.
Implications and Takeaways
- The government is squarely focused on immigration issues. Even if other tax enforcement issues will recede during the foreseeable future, payroll is an obvious area in which the government can easily apply the pressure of IRS enforcement to pursue its immigration enforcement agenda.
- Payroll noncompliance can present difficult issues for employers due to the ongoing and frequent legal requirements for accurate payroll tax filings. Monetary penalties can add up quickly. Further, once noncompliance has been detected, decisions whether to address past noncompliance need to be made quickly and can affect current and future filings.
- The use of false identification documents by undocumented workers presents a double-edged sword for employers. False documents presented to unwitting employers with adequate compliance systems can be the source of a defense regarding lack of knowledge and good-faith conduct. Conversely, if an employer accepts false identifications with actual knowledge or through the exercise of willful blindness, even more serious civil and criminal liabilities can accrue for the employer.
