Tax Law Blog

On April 9, 2025, a Michigan man pleaded guilty to filing a false tax return for his international vehicle shipping business along with not paying taxes on cash wages he paid to his employees.[1]

According to court documents and statements, Ali Kassem Kain owned and operated a business called Specialized Overseas Shipping that arranged for vehicles to be shipped to West Africa and other destinations for third parties. For tax years 2017 through 2020, Kain underreported the company’s gross receipts by $6.4 million on the business’ tax returns. Kain also did not collect and pay over to the IRS taxes on $249,000 in cash wages he paid to his employees.

Kain faces a maximum penalty of five years in prison for the employment tax offense and a maximum penalty of three years in prison for filing a false tax return. Sentencing is scheduled August 14, 2025, with U.S. District Judge Matthew F. Leitman for the Eastern District of Michigan.

What Taxpayers Should Know:

Mr. Kain stands to serve more time for his failure to collect and pay taxes on 250,000 in cash wages than for fraudulently underreporting more than 20 times that amount in gross income. Employers often underestimate the consequences of violations relating to employment taxes, which may include civil[2] and criminal[3] sanctions.

The trust fund recovery penalty (TFRP) is a civil penalty equal to 100% of unpaid trust fund tax and applies when an employer willfully fails to collect or pay over federal income tax withheld from employees' wages, Social Security and Medicare taxes. The IRS can assess this penalty against responsible officers, including owners, officers, directors, employees with financial authority, payroll managers, and even outside payroll providers.

Willful violations carry steeper civil penalties and potentially criminal liability. For civil penalties, willfulness does not require an intent to do something the taxpayer knows is illegal but can include ignoring or disregarding an obvious duty.

Since 2016, the Dept. of Justice (DOJ) has increasingly prosecuted employers failing to withhold, account for, and pay over federal employment taxes.[4] Code Sections 7201 and 7202 apply to conduct similar to that described in Section 6672, but carry very severe fines and imprisonment, and are among the most common tools examiners use to develop a criminal fraud case.[5]

The threshold for a criminal referral is not clearly defined by statute but inferred from cases and administrative authority. In the past, the IRS generally sought criminal charges only in egregious cases. Factors tending to support a criminal referral include, among others, numerous or repetitive violations, sophistication or experience of the taxpayer – especially tax or accounting expertise, and substantial amounts at issue.[6]

On the other hand, mitigating factors such as ordinary financial distress, or other sympathetic circumstances may reduce the likelihood of a criminal referral.[7] Additionally, self-reporting and/or voluntary payment of improperly unpaid taxes may also mitigate or preclude criminal or even civil liability when caught and corrected early.

In certain cases, a responsible person or owner may consider loaning money to a delinquent taxpayer to pay delinquent amounts. Such loans may be deductible as bad debt to the lender in certain circumstances where the taxpayer fails to repay. These situations require careful planning and documentation to meet the requirements for deductibility under the Code. The terms and conditions of any loan should be consistent with arm’s length arrangements among unrelated parties. Taxpayers should consider relevant indemnification arrangements, which may also affect deductibility of any payments or reimbursements to taxpayer or payor in settlement of a delinquency or other debt.

In paying delinquent amounts, taxpayers should carefully consider the order in which they pay their tax liabilities. Prioritizing any trust fund penalty amounts, for example, may mitigate the risk of a TFRP investigation and thus the risk of a criminal referral.

Conclusion:

With the rise in civil and criminal enforcement of employment tax obligations, employers must be diligent in administering, filing, collecting, and paying employment taxes. Failure to do so can have harsher consequences than taxpayers realize and extend to individuals who did not appreciate their exposure. Careful, reasonable, and consistent documentation is important; contrary statements or filings may indicate willfulness.

If you have become delinquent in your employment tax obligations or question whether a violation may have occurred or be occurring, consult an advisor to identify and resolve the situation and minimize any negative consequences to the taxpayer and its owners or responsible officers.

[1] See DOJ Press Release No. 25-357 (April 9, 2025), available at www.justice.gov.
[2] See IRC Section 6672.
[3] See IRC Sections 7201 and 7202.
[4] DOJ Press Release “Justice Department Reminds Employers of Their Employment Tax Responsibilities” (April 27, 2016), available at www.justice.gov.
[5] See IRM §4.23.9.6.3, ¶2.
[6] See, e.g., Lord, 404 Fed. Appx. 773 (4th Cir. 2010)(CEO responsible officer had worked as accountant for 20 years and had been responsible for filing and paying employment taxes in previous jobs); Brennick, 949 F. Supp. 32 (D. Mass. 1996)(involving multiple violations for different types of wrongdoing).
[7] See, e.g., Wells, No. 08-2110(NLH)(JS) (D.N.J. 10/21/09)(defendant’s husband downplayed the extent of the problem, promised to handle it, and intercepted IRS correspondence).