Title 26, United States Code, Section 7202, makes failure to collect or pay over tax a crime and provides as follows:
Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined … or imprisoned not more than five years, or both, together with the costs of prosecution.
Generally, an individual can be prosecuted under this section if they willfully failed to collect, willfully failed to truthfully account for, or willfully failed to pay over tax deducted from wages paid to an employee; this tax is commonly referred to as “trust fund taxes.”
Section 7202 is not applicable to individuals who have the duty to pay the tax (i.e. the employee); rather it is applicable to the “person” who has the duty to collect and pay over the tax (the employer). Even though, for example, motor fuel excise tax is sometimes included in the purchase price, the government must be sure to charge only those with the duty to collect and pay over the tax (seller), not those with the duty to pay the tax (buyer).
In order for the government to prove a case under § 7202, three elements must exist beyond a reasonable doubt:
- the individual had a duty to collect, and/or truthfully account for, and/or pay over a tax,
- the individual failed to collect, or truthfully account for, and/or pay over the tax, and
- did so willfully.
Duty to Collect/Account for/Pay Over
The duty of the individual is set forth in §§ 3102(a) and 3402. The specific language of § 3102(a) is set forth below:
The tax imposed by section 3101 shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid. An employer who in any calendar year pays to an employee cash remuneration to which paragraph (7)(B) of section 3121 (a) is applicable may deduct an amount equivalent to such tax from any such payment of remuneration, even though at the time of payment the total amount of such remuneration paid to the employee by the employer in the calendar year is less than the applicable dollar threshold (as defined in section 3121 (x)) for such year; and an employer who in any calendar year pays to an employee cash remuneration to which paragraph (7)(C) or (10) of section 3121 (a) is applicable may deduct an amount equivalent to such tax from any such payment of remuneration, even though at the time of payment the total amount of such remuneration paid to the employee by the employer in the calendar year is less than $100; and an employer who in any calendar year pays to an employee cash remuneration to which paragraph (8)(B) of section 3121 (a) is applicable may deduct an amount equivalent to such tax from any such payment of remuneration, even though at the time of payment the total amount of such remuneration paid to the employee by the employer in the calendar year is less than $150; and an employer who is furnished by an employee a written statement of tips (received in a calendar month) pursuant to section 6053 (a) to which paragraph (12)(B) of section 3121 (a) is applicable may deduct an amount equivalent to such tax with respect to such tips from any wages of the employee (exclusive of tips) under his control, even though at the time such statement is furnished the total amount of the tips included in statements furnished to the employer as having been received by the employee in such calendar month in the course of his employment by such employer is less than $20.
Section 3402 contains a more specific and lengthy description of these taxes.
Under Section 7202, it is the person(s) with the duty to collect, truthfully account for, and pay over who is responsible when this duty is not accomplished.
Under § 7701(a)(1), “person” is described to include an individual, a trust, estate, partnership, association, company, or corporation. Section 7343 further defines “person”:
The term “person” as used in this chapter includes 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.
An individual who has the authority to exercise significant control over an employer’s finances , not just management of the business, is considered a responsible person. Examples of persons responsible to collect, truthfully account for, and pay over include the following:
- their duties are outlined by the corporate by-laws,
- they have the ability to sign checks issued by the corporation,
- their signature is on the employer’s federal tax returns,
- their duties include being in charge of the financial affairs of the employer,
- they have the final word as to what bills should or should not be paid, and when,
- they are an officer or director of the employer,
- they have the ability to hire or fire employees, and
- they have the power and authority to pay creditors.
Willfulness
The third element the government must prove is willfulness. In the context of a §7202 prosecution, the government must show through an individual’s acts or conduct that:
- the law imposed a duty on the individual,
- the individual knew of that duty, and
- the individual voluntarily and intentionally violated that known legal duty.
Although ignorance and misconstruing of the law may be utilized to contest willfulness, arguments against the constitutional validity of the law may not.
It is not necessary for the government to prove evil/bad intent on behalf of the individual to meet the element of willfulness. An act founded in good intent that voluntarily and intentionally violates a known legal duty supports the element of willfulness.
Willfulness under this section, can be shown when an individual voluntarily and intentionally makes payments to creditors, including wages to employees, instead of the government, with the knowledge that withheld funds were due to the government. Or if the government can show the individual had sufficient funds at the time the tax was due and that the individual voluntarily and intentionally did not pay the tax.
Other examples of willfulness include, but are not limited to:
- An individual’s knowledge that cash payments were being made to employees, from which no tax was withheld,
- An individual altered records,
- An individual failed to pay over withheld taxes for an extended period of time.
Venue
The venue, for purposes of §7202, will occur in any district in which an individual was required to collect, truthfully account for, or pay over the tax.
Statute of Limitations
The statute of limitations for a §7202 prosecution is six years.