Failure to Collect and Deposit Employment Tax in Violation of Section 7215

The specific statutes that govern prosecution of such acts are Title 26, United States Code, Sections 7215 and 7512, and they provide as follows:

Section 7215. Offenses with respect to collected taxes

(a) Penalty.--Any person who fails to comply with any provision of section 7512(b) shall, in addition to any other penalties provided by law, be guilty of a misdemeanor, and, upon conviction thereof, shall be fined . . ., or imprisoned not more than one year, or both, together with the costs of prosecution.

(b) Exceptions.--This section shall not apply--

(1) to any person, if such person shows that there was reasonable doubt as to (A) whether the law required collection of tax, or (B) who was required by law to collect tax, and

(2) to any person, if such person shows that the failure to comply with the provisions of section 7512(b) was due to circumstances beyond his control.

For purposes of paragraph (2), a lack of funds existing immediately after the payment of wages (whether or not created by the payment of such wages) shall not be considered to be circumstances beyond the control of a person.

Section 7512. Separate accounting for certain collected taxes, etc.

(a) General rule.--Whenever any person who is required to collect, account for, and pay over any tax imposed by subtitle C, or chapter 33 -

(1) at the time and in the manner prescribed by law or regulations (A) fails to collect, truthfully account for, or pay over such tax, or (B) fails to make deposits, payments, or returns of such tax, and

(2) is notified, by notice delivered in hand to such person, of any such failure,

then all the requirements of subsection (b) shall be complied with. In the case of a corporation, partnership, or trust, notice delivered in hand to an officer, partner, or trustee, shall, for purposes of this section, be deemed to be notice delivered in hand to such corporation, partnership, or trust and to all officers, partners, trustees, and employees thereof.

(b) Requirements-- Any person who is required to collect, account for, and pay over any tax imposed by subtitle C, or chapter 33, if notice has been delivered to such person in accordance with subsection (a), shall collect the taxes imposed by subtitle C, or chapter 33 which become collectible after delivery of such notice, shall (not later than the end of the second banking day after any amount of such taxes is collected) deposit such amount in a separate account in a bank (as defined in section 581), and shall keep the amount of such taxes in such account until payment over to the United States. Any such account shall be designated as a special fund in trust for the United States, payable to the United States by such person as trustee.

(c) Relief from further compliance with subsection (b)--Whenever the Secretary is satisfied, with respect to any notification made under subsection (a), that all requirements of law and regulations with respect to the taxes imposed by subtitle C, or chapter 33, as the case may be, will henceforth be complied with, he may cancel such notification. Such cancelation shall take effect at such time as is specified in the notice of said cancelation.

In order for the government to prove a case under § 7215, the following three elements must exist:

1. The "person" is required to collect, account for, and pay over FICA taxes and withheld income taxes,

2. The "person" was served with the statutory notice specified by § 7512(a), and

3. The "person" failed to comply with the notice, without reasonable doubt as to their legal requirement to do so, and the failure was not due to circumstances beyond the person's control.

In short and of note, it is a violation of § 7215 to fail to comply with § 7512(b). Employers are required to (1) withhold Social Security (or FICA - Federal Insurance Contributions Act), unemployment (or FUTA - Federal Unemployment Tax Act), and income taxes from the wages of employees; (2) make quarterly returns of their withholdings on Form 941, Employer's QUARTERLY Federal Tax Return; and (3) pay over to the IRS the amounts of taxes withheld on a quarterly basis. Medicare, Social Security, and withholding taxes are referred to as "trust fund" taxes.

Since § 7215 is a legal responsibility statute, the government does not have to prove intent, willfulness, or other mental state.

It should also be noted that, while the employer does not have to segregate the trust fund taxes, it may not use the trust fund taxes for the employer's business or other purposes. Also, if an employer collects, but fails to pay over the trust fund taxes, the employee(s) is still credited with payment of the trust fund tax.

Person Required to Collect, Account for, and Pay Over

The first element the government must prove for a prosecution under § 7215, is that the individual is a "person" required to collect, account for, and pay over FICA taxes and withheld income taxes.

The first prong of this element is to show the individual charged with the violation is a "person," as considered by this statute. "Person" is described, under § 7343, as "an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs." Further, it has been held that "person" includes those with considerable control over the financial decisions within a company.

The second prong is that the individual had employees from whom trust fund taxes were required to be collected, i.e., W-2 employees and not contract laborers.

Notice of Failure to Collect, Account for, and Pay Over

The second element the government must prove to support a charge under § 7215 is the individual was notified by the IRS of their failure to collect, truthfully account for, or pay over the trust fund taxes, or to make deposits, payments, or returns of such taxes, "by notice delivered in hand...." It is acceptable to serve any officer of the company, as notice to all other officers.

The IRS utilizes Form 2481, Notice to Make Special Deposits of Taxes, as formal notice served pursuant to § 7512, which an individual signs as proof of receipt. An individual can be prosecuted without signing the form, providing the government can demonstrate the individual received the form.

Form 2481 advises the individual of the obligation to:

  • Open a special trust bank account into which all collected trust fund taxes will be deposited within two banking days after they are collected.
  • Pay over the trust fund taxes monthly through the filing of Form 720, Quarterly Federal Excise Tax Return, or Form 941-M, Employer's Monthly Federal Tax Return.

The directives of Form 2481 cannot be waived and remain in effect until receipt of written notice from the IRS terminating these requirements.

Bank Account for Trust Deposits

According to § 7512(b), the employer must "(no later than the end of the second banking day after any amount of such taxes are collected) deposit such amount in a separate account in a bank (as described in section 581), and shall keep the amount of such taxes in such account until payment over to the United States." This is also directed on Form 2481.

Section 581 states:

For purposes of sections 582 and 584, the term "bank" means a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia) or of any State, a substantial part of the business of which consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted to national banks under authority of the Comptroller of the Currency, and which is subject by law to supervision and examination by State, Territorial, or Federal authority having supervision over banking institutions. Such term also means a domestic building and loan association.

Even though the employer is directed to deposit collected taxes in the special bank account each pay period, the collected deposits are only required to be paid over to the government once a month. However, it should be noted that each pay period for which the employer fails to deposit the collected trust fund taxes the employer is committing a violation of § 7215.

For example: If employees are paid weekly and the employer fails to deposit collected trust fund taxes for a month, even though the employer is only required to pay over the collected trust fund taxes to the government monthly, the employer will be charged with four violations of § 7215.

The crux of a § 7215 violation is timeliness; therefore, it is not a defense for an employer to show the deposits were eventually made.

Circumstances Beyond Control

The third element the government must prove in § 7215 violation, is that the violation was not "due to circumstances beyond his control."

This element relates to § 7215(b)(2), which states provides, inter alia:

(2)...if such person shows that the failure to comply with the provisions of 7512(b) was due to circumstances beyond his control

For purposes of paragraph (2), a lack of funds existing immediately after the payment of wages (whether or not created by the payment of such wages) shall not be considered to be circumstances beyond the control of a person.

Courts considering the dictates of § 7215(b)(2) have determined it is the intent of the wording "circumstances beyond his control" to be narrow in allowing for exceptions, including such acts as natural disasters, fire, and other such damage that destroys the business, theft, embezzlement, or a bank error.

Venue

The venue, for purposes of §7215, will occur in any district in which the employer had their place of business or in which they maintained the special bank account, if opened.

Statute of Limitations

The statute of limitations for § 7215 violations is three years from the date the employer failed to make the required deposit to the trust account. In situations where an employer makes the required deposits, but then subsequently withdraws and utilizes the deposited funds for endeavors other than payment to the IRS, the statute of limitations may begin on the date of withdrawal of deposited funds.

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