What is a Willful Failure to Collect or Pay Over Tax?

If you have worked a full-time job for a company, you have likely noticed, and anticipated, the chunk of salary held back from your paycheck known as taxes. 

This happens because employers like myself, are required to withhold employee income tax as well as social security and Medicare taxes (social security and Medicare taxes are required by a law called the Federal Insurance Contributions Act (“FICA”) and are known together as FICA taxes) from their employee’s paychecks. 

Employers are obligated to pay these withheld amounts over to the United States. 5 26 U.S.C. §§ 3102(a) (duty to collect employee’s share of FICA), 3102(b) (duty to pay over collected FICA taxes), 3402 (duty to withhold income taxes) (duty to pay over income taxes).

26 U.S.C. § 7202 makes it a crime to:

1. Fail to collect a tax and, 
2. fail to truthfully account for or pay over a tax. This statute is intended to deal with employment tax issues, such as the aforementioned responsibility of an employer to withhold taxes from an employee’s paycheck. However, anyone who has a duty under law to collect and pay over a tax can be the target of a prosecution under this section.

Due to the significant impact employment taxes have, and the fact that surprisingly, they make up a large portion of the difference between true taxes that are actually owed to the IRS and those that are paid on time, enforcement of employment taxes is one of the Tax Division’s top priorities. See generally Tax Division – Employment Tax Enforcement.

How does the Government Prove Willful Failure to Collect or Pay Over Tax?

To prove a failure to collect or pay tax under section 7202, the Government has to prove the following elements beyond a reasonable doubt:

1. There was a duty to collect, account for, and pay over a tax;
2. a failure to collect, truthfully account for, or pay over the tax; and
3. willfulness.

United States v. Thayer, 201 F.3d 214, 219-21 (3d Cir. 1999); see also United States v. Simkanin, 420 F.3d 397, 404-05 (5th Cir. 2005).

Duty to Collect

It is well established that employers have the duty to pay over withheld taxes to the IRS, so who specifically is responsible for that duty? Section 7202 applies to “any” responsible person. 

Therefore, multiple individuals can be responsible and ultimately liable for a failure to collect, account for, and pay over the tax. See Barnett v. I.R.S., 988 F.2d 1449, 1455 (5th Cir. 1993). 

A responsible person is defined by the courts as “someone who has the status, duty and authority to avoid the [employer’s] default in collection or payment of the taxes.” Ferguson v. United States, 484 F.3d 1068, 1072 (8th Cir. 2007). 

In other words, responsibility for collecting and paying over taxes is dependent on the individual’s involvement, duties, and position within the company. 

If an individual has significant control over the company’s financial resources, this will be a good indicator that the individual has responsibility. United States v. Carrigan, 31 F.3d 130, 132-33 (3d Cir. 1994); see also United States v. McLain, 646 F.3d 599, 603 (8th Cir. 2011).

If the Government can’t prove that the defendant has a personal duty to collect, account for, and pay over the withheld taxes, the Government can still bring charges under this section together with the statute criminalizing aiding and abetting. 18 U.S.C. § 2.  

Willfulness

Willfulness has the same meaning for a failure to collect or pay over taxes as it does in the other tax crimes. See supra Tax Evasion, Willfulness. 

The Government can use circumstantial evidence (evidence which doesn’t directly support a conclusion, but requires an inference to make a conclusion from a set of facts) to prove that the defendant willfully failed to collect, truthfully account for, or pay over the tax in question. See United States v. Lynch, 227 F.Supp.3d 421 (W.D. PA 2017). 

For example, it may be inferred that a defendant intentionally failed to pay over the tax because of his or her level of  responsibility in the company, awareness of the law or illegality of the conduct, or statements regarding the potential consequences of the conduct.

Just because the employer does not have the money to pay over the required taxes, does not mean the conduct was not willful. United States v. Easterday, 564 F.3d 1004 (9th Cir. 2009). 

In fact, the courts noted that a conscious and intentional decision by a company to pay other parties to whom it owes money, including its employees, instead of paying over taxes to the Government was a clear indication of willfulness. Sorenson v. United States, 521 F.2d 325,328 (9th Cir. 1975).

If the Government is unable to show that the acts were willful, the defendant could still be charged under the misdemeanor statute for failing to deposit the required withheld taxes after notice from the IRS. 26 U.S.C. § 7512.

Venue           

The Government also must show that the case was charged in the right place. See infra. The statute regarding a failure to collect or pay over tax does not specify the location of the crime for purposes of venue. 

The offenses described in this section involve an omission or failure to do something. For crimes of omission, generally the location is where the act could have been performed. Johnston v. United States, 351 U.S. 215, 220 (1956). See United States v. Ross, 135 F. Supp. 842 (D. Md. 1955). 

Typically, the proper venue for a failure to collect or pay over tax under section 7202 is the district where the responsible individual lives, the district where the employer has its main place of business office, or the district where employment tax returns were supposed to have been filed.

Statute of Limitations 

The statute of limitations for a failure to collect or pay over taxes is six years. See United States v. Adam, 296 F.3d 327, 330-31 (5th Cir. 2002). However, there are a couple of districts where this six year statute of limitations was debated. 

Specifically, the 5th circuit held that the failure to pay over third party taxes was only subject to a three year statute of limitations because it was distinct from a failure to pay taxes, and that the six year statute of limitations applied only to a failure to pay under section 7203.  United States v. Block, 497 F. Supp. 629, 630-32 (N.D. Ga.), aff’d, 660 F.2d 1086 (5th Cir. 1980). 

What is the Punishment for Failure to Collect or Pay Over Tax?

A failure to collect or pay over tax is a class E felony. A defendant convicted of the offenses under this statute can face up to 5 in years in prison. 26 U.S.C. § 7202. 

Despite the fact that the statute provides a maximum fine of $10,000, an individual found guilty of a failure to collect or pay over taxes can be fined up to $250,000.00 and a corporation can be fined up to $500,000.00. See 18 U.S.C. §3571. The defendant may also be fined whatever the costs to the Government are in prosecuting the case.

Conclusion

“Business owners need to understand the importance of their obligations in the withholding of payroll taxes,” said United States Attorney Joseph D. Brown. “They hold those taxes in trust for the employee and the government and there are criminal penalties for those who divert those funds for other uses.”

I couldn’t have said it better myself. As a business owner however, I understand that things can get really busy and what should be priorities sometimes get relegated to the back burner. If you are a business owner who has failed to collect and pay over tax for some time, get in touch with my office and we’ll get you straightened out – hopefully before the IRS does.