Willful Failure to Collect or Pay Over Tax

Businessman pays tax via an online platform

IRS Title 26: Tax Violations: I.R.C. § 7202

Under 26 U.S.C. §7202, it is a crime to fail to collect a tax or to fail to truthfully account for or pay over a tax. An employer is responsible for withholding Federal Insurance Contribution
Act (“FICA”) taxes - consisting of Social Security taxes and Medicare taxes from the employees’ wages and remitting them to the IRS. This criminal statute deals with an employers’ failure to withhold a tax from an employee’s paycheck and/or the failure to pay the monies withheld over to the IRS. Anyone who has a legal duty to collect and pay over a tax can be prosecuted under this section. Someone who violates 26 U.S.C. §7202 is guilty of a felony and can be fined up to $10,000, imprisoned for up to 5 years, or both.

This section does not apply to individuals who have a duty to pay the tax (i.e., employees); rather, it applies to the person who has a duty to collect and pay over the tax (i.e., the employer).

Employment taxes are commonly referred to as “trust fund taxes” because the business holds the tax in trust for the government and the employee. Because these taxes make up a significant portion of the money paid to the IRS, employment tax enforcement has been and remains a primary focus of the Tax Division.

Often, in cases where an employer fails to pay over these trust fund taxes, the employer has also failed to pay the employer’s portion of the FICA tax owed. While that amount is not technically part of the calculation of the amount of loss in an indictment charging willful failure to collect employment taxes, in violation of 26 U.S.C. §7202, that amount is routinely included in the amount of loss for sentencing purposes, as relevant conduct.

Proving Failure to Collect or Pay Over Tax

Different individuals within an organization can be charged with violations of 26 U.S.C. §7202. Courts have held that a “responsible person” under the statute includes “someone who has the status, duty and authority to avoid the [employer’s] default in collection or payment of the taxes.” See, Ferguson v. United States, 484 F.3d 1068, 1072 (8th Cir. 2007). This means that criminal liability for violations of 26 U.S.C. §7202 will often depend on a person’s duties, position, and involvement in the company’s operations and the extent to which they exercise control over the company’s financial resources.

Liability under 26 U.S.C. §7202 often extends to individuals who exercise control over a business’s finances and not just management of the business. Examples of people who can be charged for violating 26 U.S.C. §7202 include those who:

  • Are responsible for paying taxes under the organization’s by-laws;
  • Have the ability to sign checks for the organization
  • Sign the company’s tax returns;
  • Are in charge of the financial affairs of their employer;
  • Have the final word over what bills should be paid and when;
  • Are officers or directors of the company;
  • Have the ability to hire and fire employees; or
  • Have the authority to pay creditors.

To convict someone for violating 26 U.S.C. §7202, the government must prove that the defendant had a personal duty to collect, account for, and pay over the tax and failed to collect, truthfully account for, and pay over the tax.

In addition, the government must prove that the failure to collect, account for, and pay over taxes was willful. Willfulness means what it does in other tax crime cases, i.e., that the defendant knew of their duty and intentionally violated it.

To establish willfulness, the government can use circumstantial evidence such as the individual’s level of responsibility in a company, awareness of the legality or illegality of the conduct, or statements regarding the potential consequences of failing to collect, account for, and pay over the tax.

Penalties for Violating 26 U.S.C. §7202

Violation of 26 U.S.C. §7202 is a class E felony punishable by a fine of up to $10,000, up to 5 years in prison, or both. However, under 18 U.S.C. §3571, a person who violates 26 U.S.C. §7202 can be fined up to $250,000. A corporation that violates 26 U.S.C. §7202 can be fined up to $500,000.

Hope Lefeber Defends People Accused of Tax Crimes

If you are under investigation or have been charged with violating 26 U.S.C. §7202, Philadelphia federal criminal defense attorney Hope Lefeber can help.

Ms. Lefeber began her career as an enforcement attorney with the Securities and Exchange Commission (SEC), where she learned first-hand how the government prepares and prosecutes white-collar criminal cases. Today, she uses that experience to defend people accused of federal tax crimes.

Ms. Lefeber’s clients describe her as a meticulously prepared advocate who fiercely and tenaciously defends people against federal criminal charges. She has extensive experience representing people accused of tax crimes in federal court and has defended accountants, CPAs, businessmen and women, individuals, and corporate taxpayers who are under investigation or have been charged with tax crimes. She is proud to provide them with a vigorous and thorough legal defense.

Learn more about Hope Lefeber and her record of success, read testimonials from other people she has helped, then contact Hope Lefeber today to schedule a confidential consultation to discuss your situation.