What's the criminal liability of employers who don't collect taxes?

Under federal law, employers must collect, account for, and forward certain taxes to the government. The employer who doesn’t fulfill this obligation is liable for civil penalties and subject to criminal prosecution.

Prosecution is possible for employers who decide not to

  • collect required taxes or
  • truthfully account for and pay over taxes. (26 U.S.C. § 7202.)

Although the law requires businesses to “collect” taxes, all they must do is retain part of their employees’ wages for payment to the IRS. A common example of the crime occurs when an employer withholds the required amounts from employees’ paychecks, then pockets them instead of paying them over to the government.

Duty to Collect

To prove a violation, the government must first establish that the employer had a duty to withhold taxes from its employees’ wages—these are taxes that the employees owe, but that the employer is responsible for sending to the IRS.

The federal taxes that an employer must collect and forward to the government include its employees’

  • Social Security and Medicaid contributions
  • unemployment tax contributions, and
  • income tax withholdings.

Once the employer withholds the taxes, the IRS credits the withholdings to the employee, regardless of whether the employer submits the funds to the government. So, it’s the employer, not the employee, who is liable for any funds that the IRS doesn’t receive.

“Responsible Person”

After determining that the employing business has a tax-collection duty, the government must identify the person within it responsible for ensuring compliance with that duty—that is, the person to be prosecuted. To determine whether someone is a “responsible person,” courts look to that person’s authority over financial matters within the company.

More than one person at a company can be responsible for employee tax withholdings and payments. Each is subject to prosecution if taxes aren’t properly handled.

The responsible person’s duty to accurately account for and pay over taxes exists independently from his superiors’ instructions. That means that he is legally responsible even if the company told him not to withhold and forward taxes.

State of Mind

To prove guilt, a prosecutor must establish that the responsible person intentionally failed to collect or account for and pay over taxes. Simple inadvertence or neglect isn’t enough. So, for example, a responsible person who didn’t collect or pay over enough taxes simply because of a miscalculation has a legal defense.

The prosecution must prove that the responsible person

  • was aware of the company’s obligation to collect and pay taxes, and
  • caused or allowed the funds to go uncollected or to be pocketed.

Belief that a tax statute is unconstitutional isn’t a valid defense. Nor is financial inability to pay. On the other hand, a responsible person isn’t liable if she relied upon a tax professional, such as an accountant or lawyer, who misadvised her.

Punishment

Failing to collect or pay over the proper amount of taxes is a felony. It carries a maximum prison sentence of five years, a fine of up to $10,000, or both. The sentence depends largely on the amount of tax not collected or accounted for and forwarded to the IRS.

Getting Legal Assistance

If you are charged with a tax crime, or are simply being investigated for one, contact an experienced criminal defense attorney immediately. Look for someone who regularly handles federal tax cases. Only an experienced attorney will be able to assess the strength of the case against you, explore any possible defenses, and represent your best interests along each step of the way.

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