Recently, the IRS and United States Department of Justice (“DOJ”) have been criminally prosecuting more payroll tax cases than ever before. Several years ago the decision was made to focus on payroll tax cases for both civil and criminal enforcement, given the importance of payroll taxes to the federal income stream.
When it comes to charging taxpayers criminally for the failure to account and pay over payroll taxes there are three main statutes the IRS and DOJ use: IRC § 7202 (the felony statute for payroll tax violations), IRC § 7215 (the misdemeanor statute for payroll violations) and IRC § 7201 (Tax Evasion).
IRC § 7202 - Willful Failure to Collect or Pay Over Tax
IRC § 7202 makes the failure of an employer to account and pay over the payroll taxes a felony. IRC § 7202 was designed primarily to assure compliance by third parties obligated to collect excise taxes and to deduct from wages paid to employees the employees’ share of Federal Insurance Contribution Act (FICA) taxes and the withholding tax on wages applicable to individual income taxes. The withheld sums are commonly referred to as “trust fund taxes” because the employer is holding those funds in trust for the United States Government.
IRC § 7215 - Offenses with Respect to Collected Taxes
IRC § 7215 is a misdemeanor offense for the failure of an employer to separately account for collected taxes under IRC § 7512.
Section 7215 is a strict criminal liability provision, which means the government is not required to prove any particular mental state, intent, or willfulness, as it must in other criminal tax violations.
The Non-Trust Portion - IRC § 7201: Attempt to Evade or Defeat Tax
IRC § 7202 covers the “trust fund” portion of the payroll tax debt, which includes just those amounts withheld from the employee’s pay. It does NOT cover the other portion, which consists of the FICA match by the employer and the federal unemployment taxes. Prosecutors may charge violations of the duty to pay with respect to either just the employer portion of the employment taxes, or may choose to charge both the employee and employer portions of employment tax by charging the employer with tax evasion in violation of IRC § 7201. The point is that the government is generally unwilling to allow the non-trust fund portion to go unpunished. If it is going to prosecute the taxpayer, it might as well go all-in on the prosecution!
Tracing of the Trust Fund Portion of Payroll Taxes and Civil Fraud
Starting in 2023 Revenue Officers will begin looking to see if they can show the failure to pay over the payroll tax was due to fraud.
The IRS has trained its Revenue Officers so that when they go to a taxpayer and do their Trust Fund Investigation, they need to try and determine what became of the unpaid trust fund portion of the employment taxes. If the taxes were spent in the business to keep it operating then the Revenue Officer will assess the employer normally under IRC § 6672. If, however, the Revenue Officer can show the money went to the owner or was spent for the owner’s benefit, they are authorized to pull the owners 1040 tax returns and see if that income was reported. If it is not they can refer the case to Criminal Investigation or simply have the income civilly assessed by an examiner and apply a 75% civil fraud penalty.
If you or someone you know has a payroll tax issue and needs help, please feel free to contact me either at egreen@gs-lawfirm.com or at (203) 285-8545.
1 Audubon Street, 3rd Floor
New Haven, CT 06511
(203) 285-8545
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