New Hampshire Startup Payroll Tax Fraud: Employees’ Taxes Spent as Free Capital

A New Hampshire startup’s CEO kept employees’ withheld payroll taxes instead of paying them to the IRS, according to the Justice Department’s announcement of his criminal payroll tax fraud case. The payroll processor repeatedly told him taxes were due, and employees raised concerns about their Social Security records. For someone inside payroll or finance, the story is in those warnings: the person controlling the money kept hearing that the taxes had not been paid.

This page follows the employer’s own withholding, wage records and payment decisions. The neighboring Elite Payroll case follows a payroll provider that charged clients for their full tax bills while reporting less to the IRS. Knowing who controlled the money separates those stories.

The CEO Controlled the Payroll Money

The Justice Department’s account of the criminal case describes a startup co-founder and CEO responsible for all of the company’s financial matters. That included quarterly employment-tax returns, employee withholding and the company’s matching Social Security and Medicare taxes.

The Justice Department reported that, from the company’s founding in 2014 through the third quarter of 2021, he withheld federal taxes from employees’ wages but failed to pay them over. He also failed to pay the company’s own employment taxes. The District of New Hampshire’s announcement adds that the unpaid withholding included state and local taxes, and records his guilty plea to willfully failing to pay over payroll taxes and failing to file a tax return.

The personal-return conduct ran alongside the payroll conduct. The district office reported that he did not file individual tax returns from 2013 through 2020 despite paying himself approximately $250,000 each year. It put the total tax loss to the IRS at more than $14.7 million.

IRS Criminal Investigation led the investigation. The Justice Department’s Tax Division and the U.S. Attorney’s Office for the District of New Hampshire prosecuted the case.

Payroll Tax Warnings and the W-2 Mismatch

The payroll tax warnings concerned unpaid taxes, while employees raised concerns about missing withholding in their Social Security records. The district office reported that the payroll service notified the CEO hundreds of times that taxes were due, while four employees complained that the Social Security Administration reported no withholding payments on their behalf.

The Justice Department’s national account describes an employee telling the CEO, on more than one occasion, that the Social Security amount on her W-2 did not match what the Social Security Administration reported. Her complaint connected the company’s wage paperwork to her separate Social Security record. We look at who received those warnings and what happened afterward, because that connects a missing payment to decisions inside the business.

The 2014 Villanova Law Review article Not Just Whistling Dixie: The Case for Tax Whistleblowers in the States reviews workplace survey evidence showing that most people who reported misconduct outside their company had first tried reporting internally. Here, the Justice Department describes repeated notices reaching the executive responsible for the taxes.

Unpaid Withholding Became Business Capital

The acting U.S. attorney for New Hampshire described the CEO as using employees’ payroll taxes as free capital to grow the business. In the same announcement, the prosecutor said he later falsely told investors that the company was tax compliant to obtain funds to address the problem.

If you worked on the company’s finances or investor communications, you may recognize the gap between internal warnings and assurances to outsiders. In the prosecutor’s account, we see employees’ tax money turned into business capital. Tax compliance was the sales pitch.

That is the working-capital problem in an employer withholding taxes but not paying the IRS. The employee’s pay has already been reduced for tax, while the employer retains money that should have gone to the government. That employee portion is trust-fund tax: money withheld for the government, not money earned by the business.

What Evidence Do I Need for an IRS Whistleblower?

For payroll tax fraud, useful evidence includes payroll registers, Forms W-2 and 941, payment authorizations, bank debits and tax-account credits. We examine the records that explain where those accounts part company, connecting the unpaid withholding to the people who controlled payment. An insider’s contribution can be the explanation linking a warning to a particular payroll period and the person deciding whether to pay.

The startup’s CEO hired a service to process payroll, yet the Justice Department describes that service repeatedly notifying him that taxes were due. Processing the payroll and paying the taxes remained separate parts of the story. The IRS’s guidance on outsourcing payroll duties distinguishes providers’ responsibilities under different arrangements, so we examine the provider’s assignment alongside who could authorize payment. We connect those records with notices and employee concerns to follow both the unpaid money and what the people controlling it knew.

What Are Some Real-Life Examples of Tax Fraud?

This startup, Elite Payroll and Nastar Roofing show different ways payroll taxes can go unpaid. Their criminal cases turn on different control over the money and the wage information.

In the Justice Department’s criminal-case account concerning Elite Payroll’s owner, the payroll business charged clients for their full tax liabilities while filing returns that substantially understated them. The comparison runs from the client’s charge to the provider’s return and deposit. Here, the startup’s own CEO retained withholding while the processor warned him that taxes were due.

In the Justice Department’s announcement about the criminal case against Nastar Roofing’s owner and payroll administrator, nominal checks went through a payroll company while the larger cash payroll stayed hidden from that company. There, the missing information began with wages kept outside the processor’s records.

How Much Do You Get for Reporting Someone for Tax Fraud?

A qualifying IRS whistleblower award can pay 15% to 30% of what the IRS collects because of the whistleblower’s information. We work with you to identify what your knowledge adds: the payroll periods, the unpaid withholding, the warnings and the decisions behind them. Those connections give the tax figures a specific account of what happened inside the business.

What to Do If Your Employer Is Committing Tax Fraud?

Talk with our whistleblower experts about the payroll warnings you saw and who could authorize the missing payments. We build the account of the unpaid withholding with you and bring in tax fraud whistleblower lawyers who understand payroll operations and financial control. Bring us the view from inside the business, and let’s pursue what those warnings reveal.