Summary

Every organization, regardless of size, structure, ownership, or other factors, is subject to increased scrutiny in today’s regulatory environment. The government (local, county, state, federal, and sometimes international) has many entry points into your business. Those entry points originate from where, when, how, and what your organization does or is supposed to do.

It’s no joke. Increasingly, companies are getting that figurative (and sometimes literal) knock on the door, only to find government agents or auditors. If you’ve been reading my articles and books over the years, you know I work with many organizations (for-profit, nonprofit, quasi-government entities, etc.) on strategic, operational, financial, and compliance systems.

Now you may think I’m just talking about government-funded entities when I talk or write about the government showing up at your door, but I’m not. Every organization, regardless of size, structure, ownership, or other factors, is subject to increased scrutiny in today’s regulatory environment. The government (local, county, state, federal, and sometimes international) has many entry points into your business. Those entry points originate from where, when, how, and what your organization does or is supposed to do.

Why Are They Here? Why Now?

Many organizations think they are doing “good enough” when it comes to understanding and following the rules (laws, regulations, terms and conditions, etc.) for their specific businesses. Unfortunately, “good enough” is probably not good enough. I’ve attended many events throughout the country, listening to entrepreneurs, small businesses, and, yes, even major companies, talking about how they handle challenges. I’ve been to startup weekends and entrepreneurial events where people lay out everything from their ideas for the latest innovation to proprietary information about customers and investors.

One thing seems to occur consistently: someone shares information about their business, finances, IP, etc., that puts crucial information into the public domain. Why does “public domain” matter? You just opened the door not only to have your IP, business, etc., impaired, but also to people who can report (whistleblower) on things you are doing wrong.

Real World Disclosure of Illegal Acts

For instance, I’m located in the Research Triangle Park area of North Carolina. In our area, several organizations provide support, advice, and more to start-ups and early-stage companies. At one of these events for CEOs and business owners, cash flow was a topic of discussion. When the moderator asked people to share how they have been dealing with cash flow issues, one CEO proudly stood up and said it was simple: “he didn’t pay the funds into the retirement plan or payroll taxes if he needed the money for other things.

I was seated beside a corporate attorney. She and I looked at each other in shock and horror. She quickly wrote me a note: “Say something!”

I waited for the moderators, well-known CEO coaches, to shoot down that idea. They didn’t. The attorney pointed at her note to me again. Reluctantly, I did speak up. I tried to be diplomatic and not embarrass the person, but honestly, I don’t have a diplomacy gene, and well, the truth hurts.

I cautioned everyone against using the “borrowing” approach shared because it was (and is) financial misconduct and illegal under ERISA (the law governing retirement plans) and tax laws. The CEO just admitted in public to actions that have massive personal liability, civil penalties, likely criminal prosecution, and prison time.

Another Example: Catastrophic Failure

Before I get into a discussion of many of the areas government agents and auditors focus on, I want to share one more example. An early-stage company with around 25 employees didn’t want to be “bothered” with all that doing payroll entailed. Things like payroll taxes were “a hassle,” according to the CEO of let’s call it, WDIJD, Inc. (What Did I Just Do, Inc.). The CEO was a well-respected businessman with a long track record in start-ups and early-stage companies.

So, he decided the company wouldn’t do payroll. Instead, everyone would get a 1099. From his perspective, the taxes and other payments would still be paid in the same amounts, so it was fine.

Now, I should tell you at this point, the company was not a client when the CEO called me with a question, “What do I do with my 1099?” Now I am not a tax expert or an attorney, but I do work with these areas at a high level to quantify and define issues and point someone to an expert (or lawyer) as needed.

Revealing Conversation

Me: What 1099?

CEO: The one from my company.

Me: Why did you get a 1099 form WDIJD?

CEO: Well, everyone gets one. We don’t do payroll.

Me: Stunned silence.

CEO: We haven’t done payroll ever.

Me: WDIJD has been in business for over 14 years. You have raised millions in investor funding and filed patents. You have a board of directors comprising lawyers, accountants, and experienced businesspeople. What do you mean you don’t do payroll?

CEO: It’s never been an issue. One of our board members is a partner at our CPA firm. They do our taxes and filings. He knows that we don’t do payroll.

More to the Story

Me: Do they also handle your retirement account compliance, etc.?

CEO: Yes. What’s your point?

Me: I need some more information before I explain my questions, etc.

CEO: I just want to know what to do with my 1099.

Me: Answer a few more questions for me, and I’ll tell you.

CEO: Sign, okay.

Me: Is your corporate/tax attorney also on your board?

CEO: Yes.

Me: What kind of employment agreements, IP agreements, etc., do you have with your employees?

CEO: Independent contractor agreements, not employment agreements.

Me: Do you have any special employee agreements, say with interns, temporary staff, or probationary periods?

CEO: Yes, to all of those. We have unpaid interns. Some of our temporary staff and probationary employees have been with us for years.

Me: You have had a probationary employee working for you for years?

CEO: Yes, we really like that person. We keep trying to find a permanent place for her, but nothing ever quite works out. So, she has worked her way around the company with probationary periods with each of our teams. I think she has been with us for three years or more, but she doesn’t receive the benefits (vacation, retirement, paid holidays, insurance, etc.) because she isn’t a permanent employee.

Me: Stunned silence.

CEO: I guess I should mention, too, that another reason not to do payroll is that we didn’t want to pay overtime. We made everyone salaried, so we don’t have to worry about how many hours they work. So we don’t fool with timesheets or time tracking. Also, the 1099s are simple that way, too.

Me: Okay, I have more than enough to tell you. You have major issues beyond what to do with your 1099. I can work with you to address these issues, but we need to bring in a new corporate attorney, a CPA, a securities attorney, an audit firm, and others.

Real-World Examples: Key Areas of Focus and Concern

Let’s start the discussion of why the government can arrive at just about any door, at any time. I’ll use the WDIJD story from above to get us started. Here are the WDIJD issues:

1. Misclassification of employees as independent contractors
2. Failure to:
   1. collect and remit payroll taxes
   1. pay overtime to non-exempt employees
   1. properly administer and remit retirement funds to the retirement account.
3. Incorrect usage of independent contractor agreements to govern employment relationships.
4. Denial of benefits, etc., to “probationary” and “temporary” employees.
5. Filing patent applications, etc., that include work products from employees who are treated as independent contractors and have IC agreements, not employment agreements.
6. For-profit with unpaid interns performing the same work as employees.
7. Funds raised from investors with inaccurate financial statements.
8. Tax returns filed incorrectly.
9. Research and development tax credits were incorrectly calculated and used.
10. Government-funded projects violations related to :
    1. Contract or Notice of Award terms and conditions.
    1. Funding program.
    1. Eligibility.
    1. False Claims.
11. Securities Law violations.

In some ways, I don’t know where to start unwrapping these two examples for you. It also isn’t possible to dig into each issue, so let me focus first on the type of violations and issues. Then we can look at the consequences for each group involved: the CEO, the Board, the Advisors, etc.

Employee Related and Other Non-compliance

This area is where companies are the most vulnerable to a whistleblower. It is also the area where I’ve seen the most violations and the most severe consequences for individuals and companies. Employee-related misconduct falls under multiple government agencies, including federal and state Departments of Revenue (IRS, etc.), Labor, ERISA, securities and fundraising regulators, and others.

Government-funded Entities Additional Impact

Additionally, government-funded companies (SBIR, STTR, etc.) and contractors must comply with all applicable laws (and regulations, etc.) to qualify to participate in programs. So, if you have back taxes, failure to file or remit taxes, or other violations, and you have government funding, then you have compounding issues.

Whistleblower Reporting

For many organizations, issues are uncovered when an employee or contractor reports them to regulators and agencies. Over the past decade or so, as individuals become more informed about labor rules and overtime laws, whistleblower reporting has increased.

Significant Issues

• Misclassification as an independent contractor, instead of an employee.
• Failure to properly classify employees as exempt and non-exempt (assuming that “salaried” means you don’t have to pay overtime).
• Failure to pay overtime to eligible employees.
• Failure to provide benefits to all employees consistent with laws, company benefit program rules, etc.
• Failure to run payroll and pay employees for wages earned. (Note: Depending on how this activity occurs (or doesn’t), there are implications for the company and individual employees involved in executing payroll.)
• Trust Fund violations for unpaid payroll taxes, etc.
• Invalid patent and intellectual applications.
  • Ownership disputes for intellectual property if “work made for hire” agreements are incorrect. Employment agreements typically give the employer IP rights. However, employees misclassified as contractors may retain default ownership unless a specific, valid agreement transfers the IP rights.
• False Statement violations on the False Claims Act related to
  • grant proposals;
  • acquisition contract proposals/submissions;
  • certifications and registrations in government systems, patent applications;
  • technical reports;
  • financial statement reports;
  • invoicing; and
  • other filings.

Non-Compliance Consequences and Repercussions

Often, people think that if your business is organized as a corporation or LLC, this limits your risk. It does, but it doesn’t eliminate it. Nor does it protect the company, executives, board, advisors, or other “responsible parties” from liability, especially when actions are deemed knowing, intentional, and/or willful.

The examples above illustrate the complexity of how a single decision to “borrow” funds related to payroll taxes or retirement trusts, or a series of related decisions (not to do payroll, treat everyone as independent contractors, not pay overtime, etc.), may have significant consequences for the organization and individuals. Let’s look at each group and their exposure and why they should be concerned when government agents knock on the door.

The Company

The company has many consequences to non-compliance, especially if it is willful, intentional, and knowing (or you should have known). These repercussions may include:

Employee-Related 

• Full back payment of all unpaid payroll taxes
  • FICA for employer and employee
  • FUTA
  • Income tax withholding and compounded interest.
• Failure-to-deposit penalties (up to 15–25%) and accuracy-related penalties.
• Full back payment of overtime
  • Retroactive overtime wages going back 2 to 3 years or more if deemed willful failure to pay.
  • Imposition of 100% liquidated damages or double damages.
• Full repayment or restitution of retroactive employee benefits, including 401(k) contributions, employer matches, and lost investment earnings for all misclassified workers.
• The entire retirement plan could potentially be disqualified from tax-favored status under ERISA.

Laws, Regulations, and Legal Actions

• False Claims Act (FCA) liability for any government-funded grants/contracts
  • treble damages, and
  • $13,946–$27,894 penalty per false claim (inflation-adjusted).
• All government funding previously received may need to be repaid or forfeited.
• Suspension or debarment from all future federal contracts, grants, or programs (FAR Subpart 9.4).
• Employee class-action or DOL lawsuits for wage theft, benefits denial, and ERISA violations (with attorney-fee awards).
• Intellectual property (patent) ownership challenges or invalidation. This may extend to the loss of patent rights under the Bayh-Dole Act (government can take title or exercise march-in rights).
  • Patent titles may be clouded when filed with IP from misclassified workers, blocking enforcement, licensing, or commercialization.
• Workers’ compensation for premium audits and retroactive premiums.
• IRS/DOL audits, liens, levies, and possible forced shutdown or bankruptcy.
• Joint-and-several liability. This allows a plaintiff (or plaintiffs) to recover the full amount of a judgment from any of the liable parties, including individuals, for many of the above amounts. A party may have to pay the full amount even if they are only partially at fault.
• Rescission by investors to unwind investments and demand their money back and return of securities received due to the serious violations and failure to disclose information.
• State-level liability may also occur for the areas listed above.

The CEO, As Officer and “Responsible Person”

• Intentional diversion of funds from payroll taxes has a 100% liability for any responsible persons (CEO, board members, and other responsible persons).
• Personal 100% of Trust Fund Recovery Penalty (TFRP) liability under IRC § 6672 for all unpaid trust-fund taxes (withheld income, Social Security, Medicare) + interest.
• Personal ERISA fiduciary liability for all plan losses, lost earnings, and any profits made from misuse of retirement funds.
• Department of Labor civil penalties up to 20%+ of recovered ERISA amounts + prohibited-transaction excise taxes (5–100%).
• Criminal exposure: up to 5 years prison for willful failure to pay payroll taxes (IRC § 7202) and/or up to 5–10 years prison + $100,000+ fines for ERISA embezzlement/theft (18 U.S.C. § 664 and Sarbanes-Oxley).
• Personal liability may fall on the CEO for back wages, overtime, and misclassification taxes.
• FCA personal liability if the CEO signed or knew about false certifications to government agencies.
• Restitution orders are court-ordered payments that convicted defendants (companies or individuals) must make to the injured party to compensate for financial losses caused by criminal conduct. These orders are often in the hundreds of thousands or millions.
• Personal asset seizure (home, bank accounts, wages, retirement savings) via IRS liens/levies. Individuals should be aware that asset seizure may extend to related parties (e.g., a spouse’s assets).
• Individual debarment from government grant and contracting programs.
• Civil lawsuits from employees and shareholders for breach of fiduciary duties.
• State-level personal liability may also occur for the areas listed above.

The Board

• Personal liability as “responsible persons” for the Trust Fund Recovery Penalty (TFRP) if their role included financial oversight or they had knowledge.
• Members may have personal ERISA fiduciary liability (same as CEO) if board decisions or oversight touched retirement-plan assets.
• Breach of corporate fiduciary duties of care and loyalty to the company/shareholders → personal lawsuits and potential indemnification denial.
• Individual board members may have joint-and-several liability with the company, CEO, and other responsible parties for unpaid taxes, wages, benefits, and FCA damages.
• Criminal exposure if board members participated in or willfully ignored the violations.
• Board members and the board entity may incur professional or reputational damage that can:
  • Not be covered by director-and-officer (D&O) insurance due to exclusion of intentional acts or failure to put in reasonable effort to fulfill fiduciary role.
  • bar individuals from future board service,
  • prevent issuance or coverage by director-and-officer (D&O) insurance, and
  •  impair professional licensing (lawyers, CPAs, etc.) and insurance coverages.

The Advisors (Attorneys, CPAs, etc.)

Financial and Accounting Advisors

CPAs who serve on boards, act as tax preparers, and are involved in retirement plan management, etc., likely have conflicts of interest among these roles. As a board member, the CPA is expected to fulfill a fiduciary role that includes oversight of vendor work product (tax filings, etc.) and the proper handling of assets and trusts (retirement plans). A person engaged in providing services to the company cannot provide objective, independent oversight of their own work.

Also, CPAs, with their years of training and credentials, are held to a professional standard when serving as board members. As a result, a CPA faces the following consequences when the company and other responsible persons fail to comply.

• Personal 100% TFRP liability (courts routinely hold CPAs/directors liable when they have knowledge or control).
• Personal ERISA fiduciary liability and prohibited self-dealing penalties.
• AICPA/PCAOB/DOL ethics violations for impaired independence → CPA license suspension or revocation.
• Malpractice and professional-liability lawsuits.
• Criminal exposure if involvement rises to willful misconduct.

Legal Advisors

Lawyers or other advisors (if they provided advice, prepared filings, or had knowledge/oversight):

• Potential “responsible person” TFRP liability or aiding-and-abetting charges.
• Professional discipline or bar complaints for ethics violations.
• Malpractice suits the company or affected employees.
• Civil or criminal liability under FCA if they assisted in false claims to the government.

Other Responsible Persons

Any individual with financial control or knowledge (controllers, HR managers, etc.):

• Personal TFRP and/or ERISA liability.
• Criminal charges for willful violations.
• Personal asset exposure and restitution orders.

Scope of Liability Issues

• Many liabilities are joint and several (any person or the company can be forced to pay the full amount).
• Government funding + pattern of willful acts (diversion of funds, multi-year misclassification, patent filings) makes this a high-priority target for IRS, DOL, DOJ, and funding agencies.
• Voluntary disclosure programs exist, but do not eliminate personal liability or debarment risk and still require full repayment plus some penalties.
• Insurance (D&O, E&O, fidelity) frequently excludes intentional acts, tax liabilities, and ERISA breaches.

When it comes to real-world outcomes involving similar cases, repayments, penalties, etc., routinely reach hundreds of thousands to tens of millions in combined payments. In addition to financial consequences, individuals, including executives and advisors, can receive prison sentences of 2–10 years or more.

Conclusion

The discussion above provides some crucial insights into why government agents and auditors may come knocking on your door. Don’t treat compliance like a knock-knock joke. Non-compliance has serious consequences for the company, officers, board, and individuals.

Businesses need to focus on comprehensive compliance. No one can say “I didn’t know.” When they have a fiduciary role to know, failure to perform that role adequately increases your risk and liability.

From executives and board members to responsible parties, you need to understand your personal fiduciary role and how it fits within the organization. The organization must understand the legal, regulatory, operational, financial, and compliance environments. Furthermore, responsible parties at all levels must ensure an ongoing compliance perspective that requires continual learning and updates on requirements.