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Employers have a duty to collect, account for and pay FICA, FUTA and withholding taxes.  When a company is accused of failing to abide by this duty, the result can be devastating. Individuals charged with the violation may also face incarceration.

Brown, PC has successfully represented numerous businesses and individuals, many with high profiles, targeted by the IRS and Department of Justice for offenses with respect to collected taxes. We work with only a limited number of carefully selected clients at any given time, so that we can devote the full breadth of our 30 years’ experience and our substantial resources to helping each client through this very difficult ordeal.

Possible Sentences for §7212(b) and §7215 Convictions

Violation of 26 U.S.C. §7212(b) is a misdemeanor punishable by up to one year in jail and a $100,000 fine for individuals and $200,000 for corporations. Alternatively, the court may impose a fine of double the loss or gain attributed to the crime.

Brown, P.C., a Dallas criminal tax firm, often uses §7212(b) as a bargaining chip in negotiations to reduce a felony charge in cases where no legal defense exists. We may also argue one of the exceptions to a person’s liability under this statute, which include:

  • Reasonable doubt as to whether the law required collection of the tax in dispute
  • Reasonable doubt as to the person who was required to collect the tax under the law
  • Failure to comply with this statute resulted from a circumstance beyond the control of the defendant.

What Are Circumstances Beyond the Taxpayer’s Control?

The statute defines circumstances beyond the taxpayer’s control very narrowly. Lack of funds to pay the taxes is not a defense, nor is putting other creditors before the IRS. Instead, the circumstances must be exceptional, such as theft, embezzlement, fire, act of God or other destruction of the business, or bank failure before transferring funds to the IRS.

Collection of Employment Taxes

The law mandates that employers collect certain taxes from their employees and deposit the funds into specially-created bank accounts. The bank account holds the funds in trust for the IRS, to be paid on a quarterly basis. These taxes include three categories:

  • The employee’s share of FICA taxes, which are the Social Security taxes that include Old Age, Survivors, Disability and Hospital Insurance
  • FUTA taxes, which are the federal unemployment taxes
  • Employee’s income taxes

The manner in which the trust fund is kept is very important. Basically, the employer is permitted to commingle the funds before paying the IRS rather than to keep the money in separate accounts. However, the employer is not allowed to use the money as working capital.

Who is responsible is another very important point. The government may only charge the employer under §7212(b) for collecting and not paying the taxes. The employee is not liable for money withheld, but not paid, by the employer and still gets credit for the payment in IRS records.

Elements of a §7215 Offense

The government must prove each element of the §7215 offenses beyond a reasonable doubt. This puts the burden on the prosecutor to prove the taxpayer committed a crime, but the defense generally involves presenting evidence that counters one or more of the elements. The three elements of a so-called trust fund case are:

  • The defendant had a duty to collect, account for and pay FICA and income taxes.
  • The defendant received proper notice as required by §7212(a).
  • The defendant failed to comply for reasons not beyond the defendant’s control.

Some courts also require the government to prove a fourth element, which is that the defendant failed to collect, account for or pay taxes in the past. This additional element arises because the statute is triggered by a defendant’s serial or repeat offenses.

Who is the Person Responsible for Collecting, Accounting for and Paying Taxes?

The first element of the trust fund provision is whether the person had a duty to collect, account for and pay the taxes. First, the term “person” used in the statute refers to the officer, employee or partner whose duty is to perform the acts at issue. The person may be the employer or a person with financial responsibilities at the employer company. One way to identify this person is to consider who has significant control over the corporation’s financial decision-making process. That decision maker has a duty to collect, account for and pay employees’ taxes.

The court differentiated the decision maker from a person who may be responsible for signing checks without authority over the disposition of funds. A person might handle all financial decisions, and thus be liable under this statute but allocate check signing to another person who is not liable.

A person may be charged as an officer, even if the corporation is not charged, as long as the government can prove the person satisfied that element of the crime. To do so, the government must demonstrate that the officer was the one responsible for the payroll taxes.  A president or vice president of a corporation may, therefore, be charged for failing to collect, account for or pay taxes upon receiving notice of the duty. Alternatively, even though the corporation is considered an employer, the officer or principal may be charged as an aider and abettor to the crime.

Who is an Employee?

The employer/employee relationship is key to the duty to collect, account for and pay taxes. In other words, was the person whose taxes are at issue an employee? This question is often complicated, especially in a modern environment of independent contractors, temporary assignments and partnerships that sometimes blur the line. However, the IRS has established a list of criteria for determining who should be classified as an employee under the statute and, more broadly, whether the employer has the right to exercise control over the activities of the workers.

Failure to Comply

The employer is responsible for collecting and depositing taxes each pay period. The employer may be charged with a separate offense for each failure to do so. Generally, the IRS does not consider the employer’s repeated failure to comply as one continuing offense because the objects of the statutes are to demand timely payment of taxes and to properly account for the funds.

Facing Tax Withholding Charges? Contact Our Dallas Criminal Tax Firm

Build a strong defense to charges of failing to collect, account for or pay your employees’ taxes as required by law. Call criminal tax firm Brown, PC for more information about protecting your rights.

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