One of the surest methods I know to get the IRS upset with you is to withhold payroll taxes and not remit them. Payroll taxes are called trust fund taxes; I’ve yet to know of a time when the IRS hasn’t gone after a business that failed to remit those taxes. I’m also unaware of any case where the IRS hasn’t pursued a payroll service who failed to remit trust fund taxed on behalf of employers it serviced.
James McLamb, of Raleigh, North Carolina, was CFO of the Castleton Group. Castleton serviced about 100 employers in the Research Triangle area of North Carolina. Serviced, though, may be the wrong word to use for Castleton; scammed appears to be more apropos.
McLamb had a unique method of handling trust fund taxes. He’d calculate the correct amount of taxes, accept those remittances, and then change the numbers to much lower figures. He’d use the lower numbers to report payroll to the IRS and the North Carolina Department of Revenue. It’s unclear from the news story where the $8 million that was supposed to go to the IRS ended up; suffice to say it didn’t end up in the U.S. Treasury and likely lined McLamb’s pockets.
The fallout from this mess is what you’d expect. McLamb has pleaded guilty to defrauding the United States; he’ll likely be sentenced to a lengthy term at ClubFed later this year. Castleton is bankrupt; it’s owner blames McLamb for the company’s problems. The employers who trusted Castleton still have to remit the taxes to the IRS & North Carolina.
I strongly advise my corporate clients to use a reputable payroll service. This is not an area to skimp on—the penalties are high for mistakes and owners can and are held personally liable when mistakes occur. Finally, if you think that an idea like McLamb’s will work over the long term you’re badly mistaken. Trust fund taxes are heavily scrutinized and the government will come after you.