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My Employee Stole Payroll Taxes
My Employee Stole Payroll Taxes – Why the IRS Says I’m Still Responsible
Here’s a nightmare that plays out in businesses across America every year: you discover your bookkeeper has been stealing from you. They collected payroll taxes from employee wages – income tax, Social Security, Medicare – but instead of sending that money to the IRS, they kept it. Tens of thousands, sometimes hundreds of thousands of dollars. Gone.
You’re devastated. You feel betrayed. You immediately call the police, file a criminal complaint, maybe hire a lawyer to sue them. You’re the victim here. Obviously.
Then the IRS contacts you. And they dont care that you’re a victim. They want their money. From you.
Welcome to Spodek Law Group. Our goal is to explain why employee theft of payroll taxes creates devastating personal liability for business owners, why the defenses you think you have dont work, and what options exist when you find yourself in this situation. Todd Spodek has represented business owners who discovered too late that being a victim doesnt protect you from being responsible. Understanding this before it happens to you could save your business and your freedom.
If your employee has stolen payroll taxes – or if the IRS is pursuing you for taxes you thought someone else handled – call us at 212-300-5196 immediately. The clock is running, and every decision you make matters.
The IRS Doesnt Care That You’re a Victim
This is the hardest truth for business owners to accept. When your employee steals payroll taxes, you occupy two positions simultaneously in the eyes of the law. You’re the victim of the theft. And your also the party responsible for the unpaid taxes.
Those two facts exist at the same time. They dont cancel each other out.
The IRS holds employers wholly responsible for reporting and paying tax liabilities. Payment of taxes to a third party – wheather thats a payroll company, a bookkeeper, or an accountant – does NOT relieve the employer of its obligations. The money was supposed to reach the IRS. It didnt. Somebody owes. And that somebody is you.
This seems fundamentally unfair. You gave the money to your bookkeeper. They were supposed to deposit it. They stole it instead. How can you owe money you already paid?
The IRS perspective is different. Those taxes were withheld from employee wages. The employees earned that money. They’re entitled to credit for Social Security, Medicare, income tax withholding. The IRS has an obligation to honor those credits regardless of what happened to the actual cash.
Somebody has to pay. And since the embezzling bookkeeper probably cant pay – they either spent the money or disappeared – the obligation falls back to the employer.
The Accupay Case
Heres a real-world example that terrified business owners across the country. Accupay was a payroll company that deducted employment taxes from their customers’ bank accounts. Clients trusted them to remit those taxes to the IRS and Maryland.
They didnt. They pocketed the money. Then they disappeared.
Every single client employer remained fully liable for the unpaid taxes. It didnt matter that they had paid the money expecting it to reach the IRS. It didnt matter that they were victims of fraud. The taxes werent paid. They owed.
The IRS explicitly stated: even if an employer can show they used reasonable care in selecting and monitoring the payroll provider, that may be insufficient to permit abatement of penalties. You could be the most careful businessperson in the world. You’re still liable.
The Ash Grove Case
In Missouri, a woman who worked as a bookkeeper for an employer embezzled more than $362,000 from the business. She also failed to pay nearly $1 million in payroll taxes to the IRS – taxes she was supposed to remit on behalf of her employer.
She went to prison for three years and five months. The court ordered her to pay restitution of $1,329,440 – $362,175 to her employer for the direct theft, and $1,071,802 to the IRS for the unpaid taxes.
Heres the devastating part for the employer: even with the thief going to prison, even with a restitution order, the employer remained responsible for the tax debt. The restitution order doesnt mean the employer is off the hook. It means the thief is supposed to pay – but if she cant (and most embezzlers cant), the employer still owes.
The employer lost $362,000 to theft. They also owe over a million dollars in taxes that were supposed to be paid with the money that was stolen. The total damage exceeds $1.3 million. And thats before penalties, interest, and legal fees.
Why “My Employee Stole It” Isnt a Defense
Business owners facing this situation immediately reach for what seems like an obvious defense: I didn’t do anything wrong. My employee stole the money. How can I be responsible?
The courts have consistently rejected this defense. Heres why.
The Trust Fund Recovery Penalty doesnt ask who committed the theft. It asks who had the AUTHORITY to ensure taxes were paid. As a business owner, you had that authority. You could have verified deposits were being made. You could have checked the IRS account. You could have supervised your bookkeeper more closely.
You delegated the task. You cant delegate the liability.
The CPA Embezzlement Case
A business owner hired a CPA to manage bookkeeping and accounting matters. The CPA embezzled between one and two million dollars from the company, including payroll taxes that were supposed to go to the IRS.
The business owner’s defense was straightforward: he hired professionals to handle these matters. He had difficulty with mathematical concepts. The failure to pay employment taxes resulted from the CPA’s embezzlement, not from anything he did.
The court rejected every argument.
The court focused on the business owner’s AUTHORITY to control the company’s tax obligations – not wheather he personally exercised that authority. He had the power to direct corporate disbursements. He had check-signing authority. He made decisions about how company funds were used.
Even more damaging: after becoming aware of the outstanding employment taxes, the business owner used company funds for other purposes. He paid rent. He paid suppliers. He kept operating.
The court’s devastating conclusion: “No such defense may be asserted by a responsible person who knew that the withholding taxes were due, but who made a conscious decision to use corporate funds to pay creditors other than the government.”
Once you KNOW about unpaid payroll taxes, every payment you make to anyone other than the IRS is evidence of willfulness.
The Moment Everything Changes – When You Discover the Theft
The moment you discover your employee stole payroll taxes is the moment your legal situation transforms completely. Before discovery, you might argue you didnt know. After discovery, that argument disappears.
Heres the pipeline that destroys business owners:
- You discover the embezzlement
- You file a police report against the employee
- You’re angry, betrayed, focused on the theft
- Meanwhile, the IRS has records showing taxes werent paid
- The IRS sends notices (maybe to an address your bookkeeper changed)
- You continue operating your business
- You pay rent, pay suppliers, make payroll
- Each payment after discovery demonstrates willfulness
- Trust Fund Recovery Penalty assessed personally
- Your bank accounts seized
- Criminal investigation opens
After discovery, every check you write becomes evidence. Your checkbook register proves the case against you. Rent check dated after discovery = willful preference of landlord over IRS. Supplier payment = willful preference. Employee payroll using NEW withholding taxes = compounding the problem.
The IRS doesnt expect you to close your business the moment you learn about unpaid taxes. But they DO expect you to prioritize paying THEM over everyone else. When you dont, they have proof of willfulness.
The Bank Account Trail
Revenue officers will subpoena your bank records. They’ll create a timeline. Discovery date here. Payment to landlord here. Payment to supplier here. Payment to IRS – nowhere.
Every transaction after discovery tells a story. That story is: you knew you owed the IRS, and you chose to pay other people instead.
The Trust Fund Recovery Penalty
When an employer fails to pay trust fund taxes – the amounts withheld from employee wages – the IRS can assess a penalty equal to 100% of the unpaid taxes against any “responsible person” who willfully failed to pay.
This isnt really a “penalty” in the sense most people understand. Its the full amount you already owed. The IRS just transferred liability from the corporation to you personally.
The Double Payment Reality
When your employee steals payroll taxes, you typically end up paying twice:
- You already paid the employee (salary/wages that included their stolen portion)
- Now you pay the IRS (the taxes that should have been remitted)
The stolen money is gone. You’ll probably never recover it. But the tax liability remains. You’re out the theft AND the taxes.
For a significant embezzlement, this can destroy a business. If your bookkeeper stole $300,000 over several years, you might owe:
- $300,000 in unpaid trust fund taxes
- Penalties and interest (potentially another 25-50%)
- Plus you already lost the $300,000 to theft
- Plus legal fees to pursue the thief
- Plus legal fees to deal with the IRS
The total exposure can easily exceed $600,000 for a $300,000 theft.
Personal Liability
The Trust Fund Recovery Penalty attaches to you PERSONALLY. Not to your corporation. Not to your LLC. To you as an individual.
Your house. Your savings. Your retirement accounts (some protected, some not). Your wages can be garnished. Your bank accounts can be levied. The IRS will pursue collection until the debt is paid or you die.
And bankruptcy wont help. Trust fund tax liability is generally non-dischargeable. You cant escape it through Chapter 7 or Chapter 13. The debt follows you for life.
Third-Party Payroll Provider Fraud
The Accupay situation wasnt unique. Payroll companies fail or commit fraud more often then you’d expect. When they do, every client employer faces the same reality: you’re still liable.
The IRS holds employers wholly responsible for their tax obligations. Outsourcing the function doesnt outsource the liability. If your payroll company takes the money and runs, YOU owe the IRS.
The “Reasonable Care” Trap
Some employers think they have a defense if they carefully selected their payroll provider. They checked references. They verified bonding. They did due diligence.
The IRS says that may not be enough. Even demonstrating “reasonable care” in selecting a provider is insufficient to permit abatement of penalties. You can be a careful victim. You’re still a victim who owes.
The Notice Address Scam
One particularly devious tactic used by fraudulent payroll companies: they change your IRS notice address. Accupay did this. When the IRS sent warnings about unpaid taxes, those warnings went to Accupay – not to the client employers.
The employers never knew there was a problem until years later when the IRS came directly to them. By then, the debt had compounded with penalties and interest.
The IRS now explicitly warns: never allow a payroll provider to change your notice address with the IRS. Keep the address current. Make sure notices come directly to you. If you let someone else receive your IRS correspondence, you’re enabling them to hide problems from you.
The EFTPS Monitoring System
The IRS provides a free tool that most employers dont use: EFTPS (Electronic Federal Tax Payment System). With EFTPS, you can log in and verify wheather deposits are being made under your Employer Identification Number.
If your payroll provider claims they’re making deposits, you can verify it yourself. If deposits arent appearing, you know immediately. The IRS explicitly recommends employers enroll and monitor.
But most employers dont bother. They trust their provider. They dont check. And when the provider steals the money, the employer’s failure to monitor becomes evidence that they didn’t exercise ordinary business care.
The Exception: CPEOs
One exception exists. Certified Professional Employer Organizations (CPEOs) are a specific type of payroll provider where the CPEO – not the client employer – is solely liable for employment taxes. If you use a CPEO and they fail, you have protection.
But most payroll providers are NOT CPEOs. And most business owners dont know the difference until its too late.
What You Should Have Done (And What To Do Now)
Prevention is the only reliable protection. Once the theft happens, your options narrow dramatically.
What You Should Have Done:
- Enrolled in EFTPS (Electronic Federal Tax Payment System) to verify deposits
- Never allowed anyone to change your IRS notice address
- Regularly verified that deposits were being made
- Separated payroll function from general accounting
- Required dual signatures on tax payments
- Reviewed 941 filings quarterly yourself
- Reconciled payroll against IRS records
Most business owners do none of these things. They trust their bookkeeper. That trust enables the theft and prevents the defense.
The irony is brutal. The more you trust your bookkeeper, the less you supervise them. The less you supervise, the more opportunity they have to steal. And the less you supervise, the easier it is for the IRS to prove you “should have known.” The trust that made theft possible is the same trust that destroys your defense.
The Willfulness Standard
For the IRS to assess the Trust Fund Recovery Penalty against you personally, they need to prove “willfulness.” Most business owners think this requires proof of evil intent. It doesn’t.
Willfulness in this context means a “voluntary, conscious and intentional act to prefer other creditors over the United States.” No bad motive required. No criminal intent needed. Just proof that you knew about the tax obligation and paid someone else instead.
“Reckless disregard” also counts as willfulness. If you should have known about unpaid taxes – even if you claim you didnt actually know – thats enough. A responsible person’s failure to investigate or correct mismanagement after being notified satisfies the willfulness requirement.
This is why employee theft cases so often result in employer liability. The employer discovers the theft. At that moment, they KNOW about unpaid taxes. If they continue operating and paying other bills, they’ve demonstrated willfulness. The theft itself might have been the bookkeeper’s crime. The continued operation with known unpaid taxes becomes the employer’s willfulness.
What To Do Now If You’ve Discovered Theft:
- Document everything immediately. Preserve all records showing when you discovered the theft and what you knew.
- Stop the bleeding. If possible, get current on payroll taxes NOW. Current compliance matters.
- Do NOT pay other creditors before the IRS. Every payment you make to someone else is evidence of willfulness.
- File criminal charges against the employee. This wont help your tax situation, but it creates a record of victimization.
- Get legal representation immediately. You need someone who understands both the criminal and civil aspects of this situation.
The defenses that seem obvious – I didnt know, my employee stole it, I’m the victim – dont work in tax court. You need an attorney who can evaluate what defenses you actually have and how to minimize your exposure.
What Happens Without Legal Help:
Business owners who try to handle this alone typically make things worse. They argue with the IRS using arguments that dont work. They continue paying other bills, creating willfulness evidence. They dont understand the timeline implications. They make statements that become admissions.
By the time they realize they need help, they’ve already created the evidence that destroys their case.
Spodek Law Group is located in the Woolworth Building at 233 Broadway in Manhattan. We handle employment tax cases nationwide, including situations where employee theft created tax liability. If you’ve discovered embezzlement, if the IRS is pursuing you for taxes you thought someone else paid, or if you’re facing Trust Fund Recovery Penalty assessment – call us at 212-300-5196.
Todd Spodek has represented employers in these situations. Some had defenses the IRS hadn’t considered. Some needed negotiation of payment plans. Some faced criminal exposure and needed strategic guidance. The earlier you get help, the more options exist.
The worst outcome is believing that being a victim protects you. It doesn’t. The IRS will pursue collection regardless of who stole the money. The only question is how you respond – and wheather you respond with legal guidance or without it.
Call us today. The consultation is free. The cost of mishandling this situation could be everything you’ve built.
The betrayal you feel is real. The anger is justified. Your employee stole from you, violated your trust, and created a nightmare. But the IRS sees the situation differently. They see a business that failed to remit taxes – and they will collect from whoever can pay.
Understanding this reality is the first step toward protecting what remains. Your employee took a lot from you. Dont let the IRS take everything else because you believed being a victim meant being protected. It doesnt. Get legal help now.