Willful Failure to Collect or Pay Over Tax – 26 U.S. Code § 7202
Federal tax law not only requires individual citizens and companies to pay their taxes on time, but it also holds accountable those responsible for collecting and paying over tax on behalf of others, such as employers withholding taxes on behalf of their employees.
If you have a legal duty to collect and pay over taxes that someone else owes, you could face criminal charges if you fail to do so.
Generally, someone can be prosecuted under section 7202 if they willfully failed to collect, willfully failed to account for truthfully, or failed to pay over tax deducted from wages paid to an employee, commonly called “trust fund taxes.”
Section 7202 does not apply to individuals who have the duty to pay the tax (employee); instead, it applies to the person who must collect and pay the tax (employer).
26 U.S. Code 7202 Willful failure to collect or pay over tax says, “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, shall be fined not more than $10,000, or imprisoned not more than five years, or both, together with the costs of prosecution.”
This federal crime is embodied in Internal Revenue Code (IRC) Section 7202. If you are an employer who willfully fails to collect and pay taxes for your employees, you could face up to five years in prison.
What is Willful Failure to Collect or Pay Over Tax?
Section 7202 criminalizes employers' deliberate neglect of specific tax-related duties. Specifically, it targets employers who intentionally fail to collect, truthfully account for, and pay any tax imposed by the Internal Revenue Service (IRS).
This law primarily concerns taxes that employers withhold from employees' wages, such as income tax, Social Security tax, and Medicare tax.
While the law is mainly geared toward employers (the group most tasked with collecting and paying over taxes), it applies to any situation in which someone is legally responsible for collecting and paying over taxes on behalf of another.
18 U.S.C. 7202 does not explicitly apply to anyone responsible for calculating and paying their taxes. However, failing to do so may result in other charges. The statute of limitations for a section 7202 prosecution is six years.
What is "Willful Failure?"
The term "willful failure" carries significant weight in this context; it refers to a voluntary, intentional violation of a known legal duty. In terms of section 7202, it means that an employer knowingly and deliberately fails to perform their tax-related responsibilities.
Notably, the emphasis here is on intent, making the crime a matter of purposeful action or inaction rather than mere oversight or error.
What Are the Elements of the Crime?
There are three critical elements to a crime under 18 U.S.C. 7202:
- Duty: The accused must have a legal duty to collect, truthfully account for, and pay over a tax.
- Failure to collect and pay over: The accused must have failed to perform their legal duty and
- Willfulness: The accused must have intentionally failed to do so.
Each element plays a crucial role in determining guilt or innocence. If the prosecution cannot prove all three beyond a reasonable doubt, the accused cannot be convicted of this offense.
What Are Some Examples?
EXAMPLE 1: Jake is the CEO of a technology company. The company has been withholding taxes from its employees' salaries for several years as the law requires. However, instead of remitting these funds to the IRS, Jake uses them to finance the company's expansion efforts. Jake could face criminal charges under 18 U.S.C. 7202 for failing to collect or pay over-tax.
EXAMPLE 2: Doris owns a startup company that has recently begun operations and is still implementing its financial systems. Due to an accounting error, the company failed to remit the total withheld taxes to the IRS for one quarter.
Upon discovering the mistake, the company immediately rectifies the error and pays the remaining tax balance. In this case, while the company might face additional penalties, Doris would likely not face criminal charges under section 7202 because the failure was not willful but due to an error, and the company took swift action to correct the mistake once it was identified.
What Are the Related Federal Laws?
26 U.S. Code Chapter 75 Subchapter A Part I General Provisions has several federal laws that are related to 26 U.S. Code 7202 Willful failure to collect or pay overtax, such as the following:
- 26 U.S.C. 7201 - Attempt to evade or defeat tax,
- 26 U.S.C. 7203 - Willful failure to file a return, supply information, or pay tax,
- 26 U.S.C. 7204 - Fraudulent statement or failure to make a statement to employees,
- 26 U.S.C. 7205 - Fraudulent withholding exemption certificate or failure to supply information,
- 26 U.S.C. 7206 - Fraud and false statements,
- 26 U.S.C. 7207 - Fraudulent returns, statements, or other documents,
- 26 U.S.C. 7208 - Offenses relating to stamps,
- 26 U.S.C. 7209 - Unauthorized use or sale of stamps,
- 26 U.S.C. 7210 - Failure to obey summons,
- 26 U.S.C. 7211 - False statements to purchasers or lessees relating to tax,
- 26 U.S.C. 7212 - Attempts to interfere with the administration of IRS laws,
- 26 U.S.C. 7213 - Unauthorized disclosure of information,
- 26 U.S.C. 7213A - Unauthorized inspection of returns or return information,
- 26 U.S.C. 7214 - Offenses by officers and employees of the United States,
- 26 U.S.C. 7215 - Offenses concerning collected taxes,
- 26 U.S.C. 7216 - Disclosure or use of information by preparers of returns,
- 26 U.S.C. 7217 - Prohibition on executive branch influence over taxpayer audits and other investigations.
What Are the Implications of Being Found Guilty?
Being guilty of willful failure to collect or pay over tax carries potentially severe penalties. If you're convicted under 18 U.S.C. 7202, you could face a fine of up to $10,000 and imprisonment for up to five years. You may also be required to cover the costs associated with prosecuting you.
What Are the Common Defenses?
Facing a charge under IRC 7202 can be daunting, and defending against the charges can be complex. However, a skilled federal criminal defense attorney can employ specific defense strategies to counter the charges. The most common defenses against section 7202 include:
- Lack of Willfulness: As intent is a crucial component of this crime, demonstrating that the failure was due to error, negligence, or a misunderstanding of the law can be a strong defense.
- Lack of Duty: If you can prove that you did not have a duty to collect, account for, or pay over the tax in question, you cannot be found guilty under section 7202.
Contact our federal defense lawyers for more information. Our law firm represents clients throughout the United States on federal criminal matters. Eisner Gorin LLP has offices in Los Angeles, California.
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