Businesses that employ individuals who are not authorized to work (unauthorized individuals) in the United States are the subject of increasing scrutiny by the Internal Revenue Service (IRS), Homeland Security Investigations (HSI), the Department of Labor (DOL), and other federal and state government agencies. Recently, the IRS and the Department of Homeland Security reached a controversial deal to require the IRS to share information with Immigration and Customs Enforcement (ICE) about undocumented immigrants who are under deportation orders. As a result, investigations into businesses that may have employed unauthorized individuals could increase.
Federal enforcement agencies are already monitoring some industries, such as commercial construction and labor staffing businesses, as evidenced by several recent criminal indictments and convictions.
In addition to federal immigration crackdowns, many states are looking to increase employment eligibility enforcement – largely by mandating the use of the federal government’s E-Verify system to validate worker eligibility. Nine states already have laws requiring employers to verify that their employees are authorized to work in the United States, and 12 others are considering similar legislation, according to a recent report from Bloomberg.
What’s at Stake for Employers Who Employ Unauthorized Workers
Whether a violation is intentional or due to inadvertent Form I-9 non-compliance, employers who employ unauthorized individuals may face significant civil and criminal penalties—and from a variety of sources, including audits by the IRS, HSI, and DOL. Resolving audits and investigations focused on the employment of unauthorized individuals requires carefully balancing the relevant tax, immigration, and employment law considerations.
From a tax perspective, businesses that fail to report the compensation paid to unauthorized individuals as wages on a Form W-2 (and thus fail to withhold and pay over to the IRS income and employment taxes) may face significant tax assessments, civil tax penalties, and exposure to criminal prosecution. Civil penalties may range from 20% to 75% of the underreported tax amount, with other penalties applying to any failure to file employment tax and information returns with the IRS. Responsible individuals in management positions at a business that employs unauthorized individuals may also face personal civil liability for the full amount of unpaid employment taxes that should have been withheld and paid over.
What Businesses Can Do About Immigration-Related Employment Eligibility Concerns
Employers that employ unauthorized individuals but are not yet under civil audit or criminal investigation may proactively resolve their compliance issues, which may include voluntarily disclosing noncompliance to the IRS in exchange for reduced civil penalties and non-prosecution.
For employers who are already under audit or investigation, it is necessary to obtain legal counsel as soon as possible to ensure a strategic and robust defense of the employer’s interests, given the complexity of resolving these matters with various federal and state agencies.
About Kostelanetz
Kostelanetz LLP attorneys have experience in addressing civil and criminal tax compliance issues for large and mid-size businesses related to the employment of unauthorized individuals. Our attorneys are skilled at both helping businesses come into compliance with employment eligibility and employment tax concerns as well as in defending their interests if civil or criminal investigations are inevitable.
Kostelanetz’s professionals have significant government experience and include a former Acting Assistant Attorney General of the Department of Justice (DOJ) Tax Division, a former Chief of the IRS Criminal Investigation Division, former Assistant United States Attorneys in the Southern District of New York, and a number of attorneys who formerly worked at the DOJ Tax Division or IRS Office of Chief Counsel.
