Failure to Pay Employer's Share of FICA Is Not Included in Tax Loss for § 7202 Convictions for Failure to Withhold and Pay Over Employee's Share (5/27/26)

In United States v. Fecondo (3rd Cir. No. 24-1618 5/26/26) (NonPrecedential), CA3 here and GS here the court held that Fecondo’s crimes of conviction under § 7202 for failure to withhold and pay over the employee share (or portion) of FICA does not include the tax loss from the employer’s failure to pay the employer share.  (The employee share is sometimes called a "trust fund" tax because deemed to be held in trust to pay over to the IRS.) The employer share is not a tax collected from the employee (by deduction from wages) withheld within the scope of § 7202, the offenses of conviction. Thus, the unpaid employer share could not be included in the tax loss for the counts of conviction. Moreover, the Court held that the employer share is not “relevant conduct” for inclusion in the tax loss under the Sentencing Guidelines. The reasoning is that, although the two portions are related in the sense that they arise from the employer’s payment of wages, failure to pay a direct tax (employer’s share) is not related to the crime of failure to withhold and pay over the employee’s share for relevant conduct purposes. They are related but not relevant conduct to the counts of conviction.

I wonder if that works in reverse. Say the defendant was convicted of tax evasion, § 7201, for failure to pay the employer’s taxes (including the employer share of FICA). Could the failure to withhold and pay over the employee share of FICA be relevant conduct? 

District Court Holds that Delinquent Payment and Filing After CI Agent Contact Is Admissible in Criminal Case (7/5/21)

In United States v. Thrush, 2021 U.S. Dist. LEXIS 118742 (E.D. Mich. 6/25/21), CL here, “Thrush was indicted on multiple counts of willfully failing to pay over payroll taxes and to file tax returns.”  After being contacted by the CI agent, Thrush “began making payments on his tax liability” and filed tax returns.  In the ensuing criminal case, the Government moved in limine “to exclude evidence of Defendant's delinquent tax payments and returns.”  

The Court held that, under Sixth Circuit precedent, Thrush could introduce the evidence.  After reviewing the case authority, the Court concluded (pp. 9-10):

Defendant's version of events, if believed, would allow a reasonable jury to infer that his failure to pay taxes and file tax returns was the result of ignorance, rather than willfulness. Accordingly, Defendant's [*10]  delinquent filings, if offered in conjunction with the assertions discussed above, would be probative of his mental state during the period in question.

In comparison, evidence of the delinquent filings poses only a modest risk of misleading the jury. The evidence will not, and cannot, be offered to show that Defendant's prior crimes, if any, were somehow vitiated, see Sansone 380 U.S. at 354, and the jury will be clearly instructed as to the elements of the charged offenses and the meaning of willfulness.

Based on the foregoing, the Government has not demonstrated that the probative value of Defendant's delinquent filings is substantially outweighed by the risk of misleading the jury.

JAT Comments:

District Court Sustains Tax Convictions but Grants Acquittal on Wire Fraud Convictions Because No Fraud (8/26/20)

In United States v. Barringer (W.D. VA Dkt No. 1:19CR00051 Order Dated 8/21/20), CL here, Barringer “convicted by a jury of three counts of willfully failing to pay over payroll taxes, two counts of wire fraud, and three counts of making false statements to federal agents.”  Broadly speaking, the gravamen of the conduct charged was an attempt to keep a business afloat by not paying over the employee’s withheld tax.  That pattern of behavior is not uncommon.  Also, it appears that Barringer’s conduct was to help her keep a good paying job.  That pattern also is not uncommon.  The interesting twist in this case is the wire fraud counts under 18 U.S.C. § 1343, and conviction on those counts.  The district court entered judgment of acquittal on the two wire fraud counts.

The factual background for the wire fraud convictions was Barringer’s effort to withdraw funds from her 401(k) plan to use the funds, perhaps in part, to keep the employer afloat.  Barringer first asked the provider of the account, a financial company, for guidance on withdrawing funds she needed to keep the employer in operation.  The provider said that that was not a permitted reason to withdraw from the account.  Barringer then applied for the withdrawal to prevent foreclosure on her primary residence, which was among the permitted reasons to withdraw.  In fact, though, Barringer was ahead on her residence payments and was not under threat of foreclosure.  The provider made the distribution.  Barringer used some of the money to pay the employer’s creditors without paying to the IRS on the withholding tax obligations and used some for her own purposes.  Then, in an interview with the IRS she repeated the lie as to her reason for withdrawal from the 401(k) account.  These facts are the basis for the wire fraud counts and for one of the false statement counts (17 U.S.C. § 1001).

The Court held that, on the record, the Government did not prove the critical element of fraud.  Although it was clear that Barringer misrepresented her reason for the withdrawal in order to fit one of the permitted reasons for withdrawal, the question was whether she thereby sought to and did commit a fraud against another person.  She was, after all, withdrawing her own money.  Here is what the Court said about that (Slip Op. 9-:

            The defendant’s main challenge is directed towards her wire fraud convictions. I agree that the government failed to prove that the defendant’s deceit deprived another of a property interest. To obtain a conviction for wire fraud, in violation of 18 U.S.C. § 1343, the government must show that the defendant “(1) devised or intended to devise a scheme to defraud and (2) used the mail or wire communications in furtherance of the scheme.” United States v. Wynn, 684 F.3d 473, 477 (4th Cir. 2012). The element “to defraud” has “the common understanding of wronging one in his property rights by dishonest methods or schemes, and usually signify the deprivation of something of value by trick, deceit, chicane, or overreaching.” Carpenter v. United States, 484 U.S. 19, 27 (1987).

            The defendant’s sufficiency challenge is that the government did not present evidence that she deprived, or intended to deprive, another of something of value because the government did not present evidence of who or what might have been deprived of their property interest by her deception and that she believed she was the sole owner of her 401(k) plan assets. * * * *

District Court Rejects Defendant's Creative Claim that Alleged Overpayments of Other Taxes Precludes Criminal Liability (5/28/20)

In United States v. Hamdan (E.D. La. Dkt. 19-60 Order Dated 5/22/20), here, the Court denied the defendants’ motion to dismiss most of the counts in their 74-count Superseding Indictment charging (i) the conspiracy by “evading paying federal income and employment taxes” (not clear whether an offense conspiracy or defraud/Klein conspiracy charge or both, but not important for this discussion) by underreporting wages, (ii) failure to account for and pay certain trust fund taxes (§ 7202), and aiding and assisting the preparation of false individual income tax returns for third parties (§ 7206(2)).  The defendants owned food marts through which the alleged crimes were committed.

In their motion, the defendants (principally Hamdan) argued (high level summary) that:  (i) Hamdan overpaid his personal income taxes in an amount exceeding the alleged employment and income taxes charged in the indictment which should have been offset against those taxes and that the alleged overpayment negated willfulness; (ii) Hamdan’s right to a credit for the alleged overpayment of tax should estop the Government from charging because the offset mechanism somehow assures taxpayers that overpayments of one tax liability will exonerate taxpayers from criminal liability related to other internal revenue tax; and (iii) that the Government has been unjustly enriched by the alleged overpayments.

The Court did not accept any of those claims, finding that the Superseding Indictment properly alleged the offenses charged.  The Court did not accept Hamdan’s key factual claim that he had overpaid his income taxes or that, even if he had, he had properly claimed the refund so that the refund would be available to offset.  Right now, I don’t see an easy path to providing a meaningful analysis of the Court’s rejection of the defendants’ diversions (creative and unusual as they were).  I just commend the opinion to readers who might find some such interesting.

§ 7202 Convictions Reversed for Improper Bad Acts Evidence (9/23/19)

In United States v. Snyder, 2019 U.S. App. LEXIS 28326 (6th Cir. 9/19/19) (unpublished), here, Snyder fell into the not uncommon trap of using company (Attevo) withheld trust fund tax for purposes other than paying over to the IRS and went one step further by using funds that should have been deposited to employee 401(k) plans.  The company failed.  The trust fund tax was not paid.  Snyder was indicted "on seven counts of willfully failing to pay over taxes, see 26 U.S.C. § 7202, and one count of embezzling from an employee-benefit plan, see 18 U.S.C. § 664."  Snyder was acquitted on two § 7202 counts and convicted on the remaining counts.

On appeal, Snyder argued that the trial court abused its discretion in allowing the introduction and use of evidence in closing argument that Snyder had failed to file personal tax returns for some number of years.  That evidence is so-called "bad acts" evidence that must run the gamut of FRE 404(b), which limits the use of such evidence, and 403, which requires exclusion of relevant evidence if prejudicial or confusing.  The court generalized the law as follows:

“The government may not use evidence of prior bad acts to show that a defendant’s character made him more likely to commit the charged crime.” United States v. English, 785 F.3d 1052, 1055 (6th Cir. 2015); see Fed. R. Evid. 404(b)(1). However, such evidence “may be admissible for another purpose, such as proving . . . intent . . . [or] absence of mistake.” Fed. R. Evid. 404(b)(2). Even if the evidence is admissible under Rule 404(b), the district court may still exclude it “if its probative value is substantially outweighed by a danger of,” among other things, “unfair prejudice, confusing the issues, [or] misleading the jury.” Fed. R. Evid. 403. 

Because the tax charges against Snyder are specific-intent offenses, this is the kind of case in which evidence of prior bad acts might be admissible. See United States v. Johnson, 27 F.3d 1186, 1191–92 (6th Cir. 1994). But that does not mean such evidence “is automatically admissible.” Id. at 1192 (emphasis added).  

Under Rule 404(b), prior bad acts are inadmissible if they “are too unrelated” to the charged conduct or “too far apart in time to be probative of” the defendant’s specific intent. United States v. Clay, 667 F.3d 689, 696 (6th Cir. 2012). Likewise, dissimilar or long-ago bad acts are usually inadmissible under Rule 403, because they have “a powerful impact on a juror’s mind” despite their “slim probative value.” Ibid. There is “too much of a risk that the jury will generalize from prior examples of bad character.” Id. at 697.

Bottom-line, the Court felt that the failure to file tax returns was too dissimilar to the crime of willful failure to pay over trust fund tax charged under § 7202.

Of course, admission of such evidence is reversible only if not harmless, as is often the case.  The Court seemed particularly troubled about the prosecutor's use of the evidence in closing argument:

If Pizzola’s testimony had amounted only to an isolated blurt, the error likely would have been harmless (as Snyder conceded at oral argument). But Pizzola’s comment was not the only reference to Snyder’s personal tax troubles: Terry, the other IRS witness, also testified about them. And to make matters worse, the government’s closing argument expressly invited the jury to make the propensity inference Rule 404(b) exists to prevent: “[Y]ou heard testimony that the defendant wasn’t even paying his own taxes. He’d done it before, and he was doing it this time.” The government’s misuse of the testimony makes it impossible to dismiss the erroneous admission of this evidence as harmless.

While the district court gave a limiting instruction, this is not “a sure-fire panacea for the prejudice resulting from the needless admission of” propensity evidence. United States v. Haywood, 280 F.3d 715, 724 (6th Cir. 2002). “As empirical studies have shown, evidence of prior bad acts influences factfinders even when the court gives a limiting instruction.” Clay, 667 F.3d at 697. A limiting instruction may be “insufficient to mitigate these potential risks,” and it does not preclude a new trial. Id. at 700–01. See also United States v. Jenkins, 345 F.3d 928, 939 (6th Cir. 2003).

 Accordingly, the Court vacated the § 7202 convictions but affirmed the embezzlement conviction.

Court Affirms Conviction, Rejecting Lesser Included Offense Instruction Request (7/17/19; 7/18/19)

In United States v. Rankin, 929 F.3d 399 (6th Cir. 2019), CA6 here, and GS here, Rankin was charged with (i) seven counts of failure to collect, account for and pay over payroll withholding tax in violation of  7202, (ii) six counts of tax perjury , § 7206(1), for individual tax returns, (iii) three counts of tax perjury, § 7206(1), for corporate returns, and (iv) one count of tax obstruction, § 7212(a). After trial, he was convicted on all counts and sentenced to 60 months (5 years).

On appeal, Rankin raised a number of issues and prevailed on only one relating to the timing of restitution.  I think only one issue is particularly interesting -- the lesser included offense issue.

Defendants facing felony count charges will often want a lesser included offense instruction to give the jury an alternative to conviction on the more serious offense charged.  Rankin was charged with seven counts of § 7202, a felony 5-year charged.  Rankin asked to a lesser included offense instruction for § 7203, failure to pay, which is a 1-year misdemeanor.  The district court denied the instruction.  The Court of Appeals affirmed the denial of the instruction.

The Court starts off with the guiding law (slip op., at 8, cleaned up; 929 F.3d at 406):

If a defendant asks for a lesser included offense instruction to which he is entitled, it is generally reversible error not to give it. A defendant is entitled to an instruction on a lesser-included offense if: (1) a proper request is made; (2) the elements of the lesser offense are identical to part of the elements of the greater offense; (3) the evidence would support a conviction on the lesser offense; and (4) the proof on the element or elements differentiating the two crimes is sufficiently disputed so that a jury could consistently acquit on the greater offense and convict on the lesser.

Section 7202 (cleaned up) makes it a felony for "any person required . . . to collect, account for, and pay over any tax imposed" to "willfully fail to collect or truthfully account for and pay over such tax."

Section 7203 (cleaned up) makes it a misdemeanor for "any person required . . . to pay any estimated tax or tax, or required . . . to make a return, keep any records, or supply any information," to "willfully fail to [do so] at the time or times required by law or regulations."

Here, the Court rejected Rankin's claim that he was entitled to a § 7203 lesser included offense instruction (slip op., at pp 8-9; 929 F.3d at 406-407). The gist of the reasoning is:  While it is true that a failure to pay over withheld payroll taxes would be a crime described in both § 7202 and § 7203, § 7202, the felony did not have an extra element that would permit a jury to convict for § 7203, the misdemeanor, but acquit for § 7202, the felony.

The Court does paint in (too) broad strokes in getting there.  The Court said (929 F.3d at 407):  "all violations of § 7203 for failing to pay a tax necessarily constitute violations of § 7202."  (929 F.3d at 407) That statement is only true in the context of taxes that a person is required to collect, account for and pay over (like payroll withholding tax). My experience is that § 7203 failure to pay cases can be applied in contexts well outside withholding taxes.

JAT Comments:

Fifth Circuit Adopts Disjunctive Reading Permitting § 7202 Conviction for Failure to Pay Over After Properly Accounting (1/12/18)

In United States v. Sertich, ___ F.3d ___, 2018 U.S. App. LEXIS 457 (5th Cir. 2018), here, the Court affirmed the convictions of Sertich, a physician, under § 7202 (failure to collect, account for and pay over trust fund tax) and § 7201(tax evasion).  The gravamen of the case, as described in the opinion, related to Sertich's pattern of conduct with respect to the trust fund tax.  He withheld the tax from the employees (including himself), accounted for withholding on the required forms and did not pay over the tax to the IRS.  Presumably, he reported the withholding to the employees (including himself) on the Form W-2 so that they (including himself) could claim the amounts withheld from them on their tax returns, Forms 1040.  (As an aside, it takes some chutzpah for a taxpayer to claim the withholding credit for his own "withheld" tax he caused not to be paid over to the IRS.) But he went beyond mere failure to pay over.  First, his accountant had told him repeatedly that he had the obligation to pay over.  Second, he resisted the IRS's attempts for years to collect the tax through avoiding IRS collection officers, filings of bankruptcy, etc.

Sertich defended his conduct by testifying at trial as follows:

He told the jury that he always intended to pay his taxes. He stated that his failure to do so was related to personal and family issues, and because he lacked the financial ability to comply. Sertich admitted he pursued bankruptcy filings to develop a payment plan, stressing that he always intended to make good on his debts. He also explained that because his accountant told him he would have to pay interest on his tax delinquency, he "assumed" the delinquency "was a loan" from the federal government.

It is not indicated whether his accountant told him that he would be subject to penalties on the failure to pay over, including the potential trust fund recovery penalty, under § 6672.

The jury convicted on all counts. 

The Court rejected Sertich's appellate argument as follows:

1.  Jury Instruction -- § 7202 Conjunctive Reading or Disjunctive Reading.

The Court lays out the law and the jury instruction as follows (italics in original):

Section 7202, titled "[w]illful failure to collect or pay over tax," provides that "[a]ny person required . . . 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 . . . be guilty of a felony." 26 U.S.C. § 7202 (emphasis added). The statute thus naturally breaks into two offenses: (1) willful failure to collect employees' taxes; or (2) willful failure to truthfully account for and pay over withheld taxes. At issue in Sertich's case is the second offense: willful failure to truthfully account for and pay over the taxes. The district court instructed the jury that as to this offense, "the government must prove that the defendant failed to comply with one of the two duties for which he was responsible," either accounting for or paying over a tax. The district court explained by example that § 7202 is violated if "a responsible person who collects taxes from his employees and files [returns] with the Internal Revenue Service . . . willfully fails to pay over the taxes to the United States."

Sertich's argument was:

Article on Justice Gorsuch's Approach to Criminal Tax Cases (5/20/2017)

I think readers will be interested in this excellent article by Jeremy Temkin:  Reading Tea Leaves: Justice Gorsuch and Criminal Tax Cases, 257 NYLJ (5/18/17), here.  The data set for the article is slim -- principally  United States v. Farr, 536 F.3d 1174 (10th Cir. 2008), here (note that the link is to the case on the UVA Law School website titled the Neil Gorsuch Project).  I have written before on the subsequent trajectory in Farr and provide the principal blog links at the end of this blog. Basically, in the 2008 case decided by then Judge Gorsuch, Farr argued successfully on the appeal that the charging document incorrectly charged her for evading "her" employment taxes (which were not her liability) rather than the trust fund penalty for which she was liable.

Here is an excerpt from Temkin's Lessons Learned:

It is, of course, necessary to exercise caution in reading tea leaves, and a narrow  sampling of cases is insufficient to conclude with confidence that Justice Gorsuch will show the same willingness as Justice Scalia to defend (certain) criminal rights. After all, Farr was a fairly unusually (sic) case, and Judge Gorsuch left open the possibility that the government could have avoided the constructive amendment problem that it had created by drafting a bare-bones indictment. That solution, of course, will not help criminal defendants who will be forced to rely on rarely granted bills of particulars to draw out the government’s case. 

In that way, Farr presents an interesting tension with Justice Scalia’s dissent in United States v. Resendiz-Ponce, 549 U.S. 102, 111 (2007). Resendiz-Ponce was convicted of illegally attempting to reenter the country based on an indictment that failed to allege that he had committed any overt act in connection with his reentry. An eight-justice majority concluded that the indictment was sufficient, reasoning that “attempt” necessarily connotes both intent and some overt act. Justice Scalia refused to give the government the benefit of that doubt. Instead he found the indictment faulty on the straightforward view that it failed to satisfy the requirement that it allege the two elements of  attempted reentry: both intent to commit the underlying crime and some act toward its commission. Thus, while both Judge Gorsuch in Farr and Justice Scalia in Resendiz-Ponce showed themselves  committed to construe indictments strictly, the former did so by encouraging the government to allege fewer particulars, while the latter concluded that more details were necessary.

JAT Note:  Of course, Farr could have been convicted of evading the employer's employment taxes (including even the employer's portion), but the charging document should not have said she evaded "her" taxes.

Prior blogs on Farr:

• Charging Decisions for Trust Fund Tax Violations (Federal Tax Crimes Blog 11/17/16), here.
• Charging Decisions for Trust Fund Tax Crimes - 7202 or 7201 (Federal Tax Crimes Blog 12/22/12), here.
• Evasion of Trust Fund Taxes and Charging Decisions (Federal Tax Crimes Blog 1/23/2012), here.
• Tenth Circuit Summarizes Double Jeopardy in Rejecting the Argument (Federal Tax Crimes Blog 1/16/10), here.

Key Graphics from TIGTA CI Employment Tax Report (3/27/17)

On Saturday, I posted a long blog entry on a TIGTA Report.  TIGTA Report on Criminal Enforcement Against Employment Tax Noncompliance (Federal Tax Crimes Blog 3/25/17), here.  In that blog entry, amid long excerpts from the report, I included several graphics from the TIGTA Report that I think are worth pulling out and posting in a separate blog entry because otherwise readers may not have focused on them in that very long blog entry.  Those graphics might be particularly useful for students or new practitioners in the tax crimes area.  In one case, I also provide the surrounding narrative for context (but refer readers to the earlier blog entry for more of the context narrative).

CI Employment Tax Investigations 2011-2015

Employment tax investigations represent a small portion CI casework. For example, in FY 2015, CI initiated 102 employment tax investigations, which is less than 3 percent of all initiated cases. In comparison, the top two priorities—identity theft and abusive return preparer fraud and questionable refund fraud—resulted in almost 1,800 new investigations and accounted for 47 percent of new initiations in FY 2015. Figure 5 shows the number of employment tax cases initiated and referred for prosecution from FYs 2011 through 2015.

   n18 Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year.

Sources of CI Employment Tax Investigations 2011-2015

TFRP and CI Employment Tax Investigations 2010-2015

IRS Civil Division Fraud Referral Process

IRS CI Investigation and DOJ Referral Process

TIGTA Report on Criminal Enforcement Against Employment Tax Noncompliance (3/25/17)

NOTE TO READERS, FOR A BETTER VIEW OF THE GRAPHICS IN THIS BLOG, CLICK ON THE GRAPHIC.

TIGTA issued a report titled A More Focused Strategy Is Needed to Effectively Address Egregious Employment Tax Crimes (Ref # 2017-IE-R004 3/21/17), here.  I highly recommend the report to readers, both those watching the trajectory of criminal tax prosecutions and for students wanting to know more about the process.  I will report on some of the key features here to encourage readers to read or at least puruse the whole report.

I briefly introduce the key context for the report.

Employment taxes withheld from employee compensation and remitted to the IRS are the backbone of our tax and FICA system.  There must be robust incentives to encourage compliance by employers and those within the employer organization reponsible for employment tax withhold and payment to the IRS.  Those incentives include the standard range of civil and criminal penalties applicable to employers that apply to tax noncompliance.  But employment tax noncompliance requires that the penalty disincentives include potential civil liability and criminal penalties of those inside the employer organization that were responsible for the employment tax noncompliance.

The Trust Fund Recovery Penalty ("TFRP") in § 6672, here, is a civil collection mechanism whereby persons within an employer organization required to withhold, collect and pay over employment taxes from the compensation paid employees can be held civilly liable for those taxes.  Liability requires that the person have acted willfully.

The parallel criminal penalty for that failure to withhold, collect and payover employment taxes is in § 7202, here.  That provision imposes up to a 5-year incarceration period for each failure.  Liability requires that the person have acted willfully, but this is generally perceived as a higher level of willfulness than required for the TFRP.

The IRS investigates failures to withhold, collect and pay over.  Where it can, it tries to collect from the employer.  In order to insure collection, it may assert the TFRP against persons it believes are responsible for the noncompliance.  An IRS collection officer investigates the delinquent employment taxes and makes determinations as to potential TFRP liability.  The IRS collection officer will also look for indicators and fraud and, if firm indicators of fraud (also called badges of fraud) are found, may, in conjunction with his supervisor and the fraud technical adviser, refer the the case to IRS Criminal Investigation ("CI") to consider whether the case should be further investigated for potential criminal prosecution and referred to DOJ Tax Criminal Enforcement Section.

With that introduction the following is the the cover memorandum for the TIGTA report (I omit footnotes):

Synopsis 

Employment tax noncompliance is a serious crime. Employment taxes finance Federal Government operations plus Social Security and Medicare. When employers willfully fail to account for and deposit employment taxes, which they are holding in trust on behalf of the Federal Government, they are in effect stealing from the Government. As of December 2015, 1.4 million employers owed approximately $45.6 billion in unpaid employment taxes, interest, and penalties. The TFRP is a civil enforcement tool the Collection function can use to discourage employers from continuing egregious employment tax noncompliance and provides an additional source of collection for unpaid employment taxes. In FY 2015, the IRS assessed the TFRP against approximately 27,000 responsible persons—38 percent fewer than just five years before as a result of diminished revenue officer resources. In contrast, the number of employers with egregious employment tax noncompliance (20 or more quarters of delinquent employment taxes) is steadily growing—more than tripling in a 17-year period. For some tax debtors, assessing the TFRP does not stop the abuse. Although the willful failure to remit employment taxes is a felony, there are fewer than 100 criminal convictions per year. In addition, since the number of actual convictions is so miniscule, in our opinion, there is likely little deterrent effect. 

Recommendation 

The TIGTA recommended that the Commissioner, Small Business/Self-Employed Division and the Chief, CI, should consider a focused strategy to enhance the effectiveness of the IRS’s efforts to address egregious employment tax cases. This strategy should include use of data analytics to better target egregious employment tax noncompliance, including identification of high-dollar cases and individuals with multiple companies that are noncompliant. In addition, the Collection function should expand the criteria used to refer potentially criminal employment tax cases to CI to include any egregious cases (not only those where a firm indication of fraud is present).  

Response 

The IRS partially agreed with our recommendation. The IRS agreed with the portion of our recommendation describing a focused strategy to enhance effectiveness of the IRS’s efforts to address egregious employment tax cases by citing various initiatives in process and completed. However, the IRS did not specifically address our recommendation to enhance the use of data analytics. The IRS disagreed with the portion of our recommendation that the Collection function should expand the criteria used to refer potentially criminal employment tax cases to CI to include any egregious cases (not only those where a firm indication of fraud is present) citing the need to balance several factors by a number of stakeholders and limited government resources including limitations on the number of criminal tax cases the United States Attorneys and the US Courts can accommodate. Management’s response to the draft report is included as Appendix IX.

Tax Attorney Sentenced to 48 Months of § 7202 Convictions (1/14/17)

I previously reported on a tax attorney, Steven Lynch, being convicted of charges for employment tax fraud under § 7202, here.  See Tax Attorney Convicted of Employment Tax Fraud (Federal Tax Crimes Blog 9/8/16; 9/10/16), here.  The defendant has now been sentenced to 48 months in prison (48 months on each count to be served concurrently)  See the judgment here.  Also see the docket entries here.

Prior to the sentencing, the sentencing judge ruled only various post-trial motions, some of which merely restated motions or claims made before or during trial.  See Memorandum Order Denying Defendant's Motion for Judgment of Acquittal or, in the Alternative, Motion for New Trial in United States v. Lynch, 2017 U.S. Dist. LEXIS 634 (WD PA 2017), here.  The matters dealt with in the Order and the rulings are more or less garden variety, so I won't discuss them here.  Rather, I just point out certain matters that caught my eye in the Order.

1.  The defendant is described as "a highly skilled tax attorney and sophisticated businessman * * * The evidence at trial fairly established that Lynch possessed superior knowledge of tax and corporate laws which he used to keep Internal Revenue Service ("IRS") agents from being able to collect taxes due for several entities that make up the Iceoplex - - a collection of businesses related to an indoor ice skating rink - - by shifting assets and employees among several entities."

2.  The defendant was charged with tax obstruction, § 7212(a), here, in addition to several counts of willful failure to pay over, § 7202.  He was acquitted of tax obstruction and some of the willful failure to pay over counts.  He was convicted of some of the willful failure to pay over counts.

3.  The Court cites as among the evidence from which the jury could have convicted Lynch of the willful failure to pay over the following (bold face supplied by JAT):

• The FBI's interview of Lynch in March of 2011, during which he was notified that he was the subject of a criminal investigation for willful failure to pay employment taxes. Doc. No. 223, p. 216-218. After the FBI interview, Lynch made full, timely payments for three subsequent quarters and substantial partial payments for two more subsequent quarters before failing to make any payment towards the taxes owed for the quarters related to the Counts for which he was convicted. See Doc. No. 201, pp. 44-49.

The inference that could be drawn from the FBI interview and subsequent events is, I think, fair.  The question I have is why the FBI would have been conducting a tax crimes investigation as seems to be the  import of the first sentence.  As I have discussed in several blog entries, the ability of the DOJ (including its FBI component) to investigate tax crimes is at least questionable.  See DOJ Tax Division Criminal Tax Investigation Authority (Federal Tax Crimes Blog 6/5/09; 12/29/14), here; and Even More on DOJ Authority to Investigate Tax Crimes (Federal Tax Crimes Blog 7/20/10), here.  I find that the IRS continues to claim that exclusive investigative authority on its web page titled Financial Investigations - Criminal Investigation, here, where it states:  "IRS is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code."  I suppose that the FBI's interview could have been incident to a grand jury investigation in which the grand jury could have been investigating other nontax crimes as well, but the opinion does not state that.

Charging Decisions for Trust Fund Tax Violations (11/17/16)

DOJ Tax issued this press release:  Nevada Woman Indicted For Evading Payment of Trust Fund Recovery Penalties (11/16/16), here.  The key excerpts are:

According to the superseding indictment, Maria Larkin aka Maria Bella-Larkin, owned and operated Five Star Home Health Care Inc. (FSHHC) from 1996 through 2009 and was responsible for collecting, accounting for, and paying over income, social security, and Medicare tax withheld from employees’ wages.  The tax withheld is referred to as “trust fund tax” because the employer holds those funds in trust until the amounts are paid over to the Internal Revenue Service (IRS) on behalf of the employee.  If a responsible person willfully fails to pay over trust fund taxes, the IRS may impose a penalty equal to the amount of the trust fund taxes on the responsible person.  This penalty is known as the trust fund recovery penalty.  

The superseding indictment alleges that from 2004 through 2009, FSHHC failed to pay over the tax withheld from its employees’ wages and, as a result, the IRS assessed trust fund recovery penalties against Larkin equal to the amount withheld and not paid over. 

According to the superseding indictment, Larkin willfully attempted to evade and defeat the payment of the trust fund recovery penalties assessed against her by concealing and attempting to conceal from the IRS her access to personal funds and assets.  Specifically, the superseding indictment alleges that Larkin purchased a home in the name of a nominee, engaged in currency transactions with financial institutions in amounts less than $10,000 to prevent the filing of currency transaction reports, changed the name of her business and placed the business in the name of a nominee, and provided false information to the IRS regarding her ability to pay the trust fund recovery penalties.

The superseding indictment is here:

This is a fairly routine prosecution as described in the press release and superseding indictment.  Trust fund prosecutions have been increasing for a number of years now.  See DOJ Tax Promotes Employment Tax Criminal Prosecutions (3/10/16), here (noting DOJ Tax's request, adopted in the 2016 Guidelines under § 2T1.6, to drop the description in the Sentencing Guidelines that § 7202 is "infrequently prosecuted"); see also Michael Chittenden and Yongo Ding, DOJ Repeatedly Signals Intent to Ramp Up Criminal Prosecutions for Employment Tax Failures (Miller & Chevalier Blog 4/16/16), here; and an ABA slide presentation titled Civil and Criminal Employment Tax Enforcement Efforts - Employers Beware (5/18/16), here, presented by Josh Ungerman, Leigh Kessler and Dennis L. Perez.

The question I address in this blog is the overlap between willful failure to collect and pay over tax § 7202, here, and other tax crimes, such as tax evasion § 7201, here.  I have addressed this subject before:  Evasion of Trust Fund Taxes and Charging Decisions (1/23/2012), here, where I discuss the Farr case referenced in the CTM quote below; United States v. Farr, 536 F.3d 1174 (10th Cir. 2008), here; and Criminal Restitution for Employment Taxes and Trust Fund Liability Under Section 6672 (6/18/13), here.  The ABA slide presentation above indicates that the following crimes are often present:

Tax Attorney Convicted of Employment Tax Fraud (9/8/16; 9/10/16)

This DOJ Tax press release, here, caught my eye because the title was:  Pittsburgh Tax Attorney and Owner of Iceoplex Convicted of Employment Tax Fraud.  The 16 counts are for convictions under § 7202, here, titled "Willful failure to collect or pay over tax."  Don't know the details or,  really anything else noteworthy, except the following excerpted from the press release:

According to the evidence presented at trial, between 2004 and 2015, Steven Lynch, a tax attorney, co-owned and operated the Iceoplex at Southpointe, a recreational sports facility located in Washington County, Pennsylvania.  The Iceoplex included a fitness center, ice rink, soccer court, restaurant and bar.  Lynch controlled the finances for these businesses and was responsible for collecting income and employment taxes withheld from employee wages, accounting for these taxes and filing Forms 941, payroll tax returns, and paying these taxes over to the Internal Revenue Service (IRS).  The jury found that between 2012 through 2015, Lynch failed to timely pay over to the IRS more than $790,000 in taxes withheld from the wages of the employees for these businesses. 

JAT Comments:

1.  For some years, the IRS and DOJ Tax have been stepping up their criminal enforcement efforts in the employment tax area.  The point the IRS and DOJ Tax wants to make that those who think that this is just a civil tax issue may be mistaken, and may be criminally investigated, charged, convicted, sentenced and spend some time in jail, all the while remaining liable for the taxes evaded (and  a host of related costs, including other penalties and fines).  And, even if they are lucky enough to avoid all those criminal related costs, they are still subject to potential trust fund recovery penalty liability under § 6672, here, titled "Failure to collect and pay over tax, or attempt to evade or defeat tax."  (Readers should note that, although the titles of the criminal and civil provisions are slightly different, the substantive language is virtually the same, with the criminal statute simply requiring proof for conviction beyond a reasonable doubt.  Not a comforting thought for those who play this game, as the IRS and DOJ Tax increase their criminal enforcement efforts.

2.  Based solely on the sentencing factors noted  in the press release (indicated tax loss over $790,000, no acceptance of responsibility downward adjustment, and presuming the pre-2015 Guidelines), the indicated Guidelines level is 20 (according to my Guidelines spreadsheet) and the indicated sentencing range is 33-41 months.  (By contrast, had Lynch pled guilty to achieve an acceptance of responsibility downward adjustment (or, in the rare even he might otherwise qualify for acceptance of responsibility) the sentencing level would have been 17 with an indicated range of 24-30 months, so that he could have achieved a 9 month lesser sentence at the bottom of each Guidelines range.) Of course, the judge can always do a Booker variance, which, in tax cases, is almost always downward.  But that will depend upon factors not evident from the press release.  Those additional factors are produced for the court in the Pre-Sentence Report ("PSR") and the parties sentencing submissions after review the PSR.  When the sentence is announced, I will dig around what is the in public report (usually not the PSR, but perhaps some contested portions of it) and report back.

Addendum on 9/10/16 12:30pm:

3. Robert Horwitz, a seasoned criminal tax attorney, here, called my attention to a typo on the blog and to a more substantive issue.  I have corrected the typo.  More important is the substantive question he raised.  Paraphrased, he asked whether, as specifically stated in the press release, the jury found that Lynch failed to timely pay over $790,000.  Readers will recall that, in tax evasion cases, the jury finds only that the defendant committed tax evasion, but does not find a specific amount.  (This was the issue addressed in the blog entries on the Senyszen case discussed in 3 blogs, here.)  The conviction here was for willful failure to collect and pay over, § 7202, here.  The amount involved is not an element of this crime, so Robert's question was whether the DOJ press release was correct that the jury made a finding on amount of over $790,000.

So, I went to Pacer and pulled down the jury verdict form, here.  From the jury verdict, the following went to the jury:

• Tax obstruction, § 7212(a) (one count, presented as Count 1): Jury verdict:  NOT GUILTY.
• 2. Failure to collect and pay over, § 7202 (28 counts, one per employer per quarter, presented as Counts ___ - ___, with one in  that series dismissed):  NOT GUILTY ON 11 COUNTS, GUILTY ON 16 COUNTS. 

Most importantly for the present discussion, the jury verdict does not find any amount of tax involved.  But, the jury verdict does find the defendant guilty of 16 counts and the counts, as alleged in the superseding indictment, here, does contain the approximate numbers for each quarter.  So, the jury verdict although not explicit as to amounts might make the finding by incorporation from the superseding indictment.  Since, however, the amount of tax involved is not an element of the crime, I presume that the authority for § 7201 might be applicable here as well/

My calculations from the superseding indictment shows the following:  tax amount for 16 counts of conviction  $725,728; tax amount for 11 not guilty counts $694,044, tax amount dismissed count (count 12) $24,998, aggregate tax amount $1,444,260.  I am not sure where the reported $790,000 amount comes from, but I do note that the amounts could have been refined in the presentations at trial.  In any event, the key break point for the sentencing calculations is $1,000,000.

As readers know, the intended tax loss ("tax loss") is determined at the sentencing phase for the first, most critical, step in the sentencing guidelines calculation.  Importantly, in terms of the guidelines calculations, though, the tax loss for the guidelines calculations also includes the tax loss for "relevant conduct."  See §1B1.3.  Relevant Conduct (Factors that Determine the Guideline Range), here.  The tax loss involved in not guilty counts may well be in play in calculating the guidelines range because the standard of proof is preponderance of the evidence rather than beyond a reasonable doubt.  Using the indicated tax loss for the counts of not guilty verdicts, the aggregate loss will move the calculation to the next bracket (which covers the range from $1,000,000 to $2,500,000, so that is a comfortable conclusion for the not guilty counts).  That will move the sentencing table calculation to offense level 22 and an indicated sentencing range of 41-51 months.

Finally, with 16 counts of conviction for the 5 year § 7202 felony, the maximum sentence could be 80 years.  As indicated, even with relevant conduct, the guidelines calculations will produce a sentence of far less than that.

DOJ Tax Promotes Employment Tax Criminal Prosecutions (3/10/16)

I have previously posted on certain comments at a recent Federal Bar Conference.  See Report on Remarks of AAG Tax and Practitioner Regarding Nonwillfulness and Foreign Account Enablers (3/7/16), here, and Acting AAG Remarks to Tax Conference - the Criminal Topics (3/4/16), here. A significant portion of the  AAG's prepared remarks related to criminal enforcement initiatives for prosecutions under § 7202, Willful failure to collect or pay over tax, here.  This is the criminal analog to the trust fund recovery penalty, § 6672, Failure to collect and pay over tax, or attempt to evade or defeat tax, here.  The article is Matthew R. Madara,  DOJ Seeking to Change Employment Tax Sentencing Guideline, 2016 TNT 45-8 (3/8/16) [no link available].

Key points and extrapolations from the article are:

1.  As DOJ Tax has made clear both in pronouncements and prosecutions, it is very serious about § 7202 prosecutions.

2.  DOJ Tax is seeking to amend the Sentencing Guidelines statement in the background to the § 7202 Guideline, §2T1.6.Failing to Collect or Truthfully Account for and Pay Over Tax, here, that "The offense is a felony that is infrequently prosecuted."  Specifically, DOJ Tax wants the vestige reference to infrequently dropped (which would probably mean dropping out all after felony).  The proposed amendments are here, with the proposal on § 7202 at pp. 3-4 which says in pertinent part:

The Background commentary to §2T1.6 states that “[t]he offense is a felony that is infrequently prosecuted.” The Department of Justice in its annual letter to the Commission has proposed that the “infrequently prosecuted” statement should be deleted. The Department points out that while that statement may have been accurate when the relevant commentary was originally written (in 1987), the number of prosecutions under section 7202 have since increased substantially. The use of §2T1.6 increased from three cases in 2002 to 46 cases in 2014. See United States Sentencing Commission, Use of Guidelines and Specific Offense Characteristics: Guideline Calculation Based (Fiscal Year 2002), at http://www.ussc.gov/research-and-publications/federal-sentencingstatistics/guideline-application-requencies/guideline-application-frequencies-2002; United States Sentencing Commission, Use of Guidelines and Specific Offense Characteristics: Guideline Calculation Based (Fiscal Year 2014), at http://www.ussc.gov/sites/default/files/pdf/research-andpublications/federal-sentencing-statistics/guideline-applicationfrequencies/2014/Use_of_SOC_Guideline_Based.pdf

3.  Besides being inaccurate because of the increase in § 7202 prosecutions, the statement is being deployed by defense lawyers to minimize the gravity of the offense in sentencings.  I would not think, however, that sentencing judges are much swayed by that genre of argument.

4.  As to characteristics of failure to withhold and pay over cases that are prosecutors, a DOJ Tax attorney said that DOJ Tax is particularly looking for cases where the responsible parties have lied to the IRS.  (As I has said often on the blog, criminal tax cases, like many or most white collar crimes cases, are principally about the lie, in one form or another.)  The lie is what will help make the substantial burden to prove willfulness beyond a reasonable doubt.

5.  Proving willfulness -- and thus obtaining conviction -- is relatively straightfoward despite the criminal burden of proof.  If the employer -- with the action of the responsible person -- has withheld from the wages, any defense by the responsible person with regard to failing to pay over "falls by the wayside."

DOJ Tax Enforcement Priority for Employer Trust Fund Taxes (10/10/15)

The IRS and DOJ have been pursuing employment trust fund taxes for some time.  DOJ Tax is making the public aware of increased concerns and efforts in this area, particularly the criminal sanction in Section 7202, here.  See Employers Beware: AAG Ciraolo Emphasizes Employment Taxes as Enforcement Priority (Post & Schell Tax Controvery Posts 10/9/15), here.  For a similar article see Nathan J. Richman, Tax Division Official Gives Insight Into Enforcement Priorities, 2015 TNT 197-7 (10/13/15) [No Link Available].

An excerpt from the P&S Blog entry to whet your appetites:

Acting AAG Ciraolo described the issue of employment and payroll taxes as a “really big area for us right now.” Although employment taxes have been listed as a DOJ Tax Division priority in the past, Acting AAG Ciraolo noted that enforcement in this area has become a “team effort” between DOJ and the civil and criminal sides of IRS. This team effort includes related training of IRS Revenue Officers, Fraud Technical Advisors, and Special Agents, as well as DOJ lawyers. Acting AAG Ciraolo also announced that the Criminal Section of DOJ Tax Division recently updated the section of the DOJ Criminal Tax Manual that pertains to 26 U.S.C. § 7202, a criminal statute which specifically applies to willful failures to collect or pay over employment taxes.

Of course, for most practitioners the trust fund tax issue will be most commonly encountered in the trust fund recovery penalty in Section 6672, here.

Tidbits from ABA Tax Section May Meeting (5/13/15)

I attended the ABA Tax Section May Meeting this past week.  I have some items of interest to some readers.

1.  Trust Fund Tax Cases. IRS CI representative emphasized the continuing emphasis on failure to pay over withheld employee tax.  For those with subscriptions to Tax Notes Today, the following article has some detail:  Andrew Velarde, ABA Meeting: Employment Taxes Will Be Focus in Criminal Investigations, 2015 TNT 91-6 (5/12/15).  The representative did say that generally only the egregious cases involving lavish spending by the persons failing to pay over the withheld taxes, but that the public needs to know that even failing to pay over in order to keep the business afloat and employees paid is still a crime.  One practitioner referred to a general understanding among practitioners that, if the withheld tax is used for personal expenditures, that is a criminal problem, but, if used to keep the business going, that was not a criminal problem.  But, the IRS representative said that practitioners perhaps should be cautious about continuing to rely upon the supposed rule because the public and practitioners should not think they have a criminal prosecution pass just because they were trying to keep the business afloat.

2. Virtual Currency.  The IRS said that it is ramping up its enforcement for virtual currency.  The IRS reported in the 2014 CI Annual Business Report, here:

Virtual Currency: During Fiscal Year 2013, Criminal Investigation began pursuing investigations in the new program area of virtual currency. Virtual currency is considered any medium of exchange that operates like a fiat currency but does not have legal tender status in any jurisdiction. As with any money, virtual currency can be used in a wide variety of crimes involving tax fraud, money laundering, and other financial crimes. During Fiscal Year 2014, IRS-CI had a substantial role in the investigation that led to a criminal complaint and shut down of the Silk Road. IRS-CI also played a substantial role in a spinoff investigation related to the Silk Road that led to the criminal complaint and guilty plea of Charlie Shrem. Both of these investigations involved a significant component of virtual currency. 

In Fiscal Year 2015, IRS-CI will continue to focus on financial crimes that involve virtual currency by collaborating with FinCEN and other federal law enforcement agencies to identify the movement of illegal monies utilizing virtual currency. In addition, IRS-CI will continue its collaboration efforts with other Business Operating Divisions (BOD) within IRS to include SB/SE and LBI. IRS-CI will work with the BODs to evaluate the effect of the virtual currency guidance issued by IRS in March 2014 and to investigate those individuals who use virtual currency as a tool to evade taxes.

3.  Suspicious Activity Reports.  Ever wonder what happens with all those suspicious activity reports filed by banks and others?  There is a Suspicious Activity Report Task Force in each judicial district lead by an AUSA and with IRS CI agents assisting the analysis of the reports.

Sentencing for Failure to Pay Over Trust Fund Taxes (5/6/15)

We have another reminder that DOJ Tax is serious about prosecuting people who fail to pay over trust fund taxes -- the taxes withheld from employees.  DOJ Tax announced here that Kevin Bertram, a former CEO of a wireless technology firm (Distributive Networks LLC), was sentenced to 30 months and ordered to pay restitution of almost $900,000.  Excerpts from the press release are:

According to court documents, Bertram operated Distributive Networks from 2004 through 2010.  Bertram’s company, which was named one of Washington, D.C.’s “Great Places to Work” by Washingtonian magazine in 2007, created technology that allowed cell phone users to participate in contests, download ringtones and receive content such as trivia and horoscopes.  

According to court documents, Distributive Networks provided employee perks, such as free Starbucks coffee and gym memberships, and a 100 percent matching contribution to its employees’ 401(k) plans.  However, Bertram willfully failed to comply with Distributive Networks’ employment tax obligations.  For the quarterly tax periods in late 2007 through mid-2009, Bertram failed to file Distributive Networks’ required quarterly IRS Forms 941 (Employer’s Quarterly Federal Tax Returns) and failed to pay over $927,921.78 in employment taxes due to the IRS.  At the same time that Bertram was failing to pay the IRS income and other taxes withheld from employees’ paychecks, he spent hundreds of thousands of dollars of company funds on sporting event tickets and personal luxury goods.

I am reminded in another context that Enron used to be rated a great place to work.

DOJ Tax Tough Talk About the Violating Trust Fund Tax Withholding and Payment Obligations (2/27/15)

Liability for trust fund taxes are omnipresent in businesses.  Trust fund taxes are the taxes that an employer is required to withhold from an employee's compensation and to account for and pay over to the IRS.  The trust fund taxes include income tax withholding and FICA and Medicare tax withholding. In concept, they are deemed paid to the employee for services, taken back from the employee, held for a short period in trust, and paid to the IRS to satisfy the employee's tax obligations.  Here is a good summary of the trust fund tax and the trust fund recovery penalty ("TFRP") which serves as a principal incentive on employers to withhold (from Collins v. United States, 848 F.2d 740, 741-42 (6th Cir. 1988)):

The Internal Revenue Code requires employers to withhold social security and federal excise taxes from their employees' wages. [§§ 3402(a), 3102(a).] The employer holds these monies in trust for the United States.§ 7501(a) [here]. Accordingly, courts often refer to the withheld amounts as “trust fund taxes”; these monies exist for the exclusive use of the government, not the employer. Payment of these trust fund taxes is not excused merely because as a matter of sound business judgment, the money was paid to suppliers in order to keep the corporation operating as a going concern – the government cannot be made an unwilling partner in a floundering business. 

The Code assures compliance by the employer with its obligation to pay trust fund taxes by imposing personal liability on officers or agents of the employer responsible for the employer's decisions regarding withholding and payment of the taxes. Slodov v. United States, 436 U.S. 238  (1978).   To that end, § 6672(a) [here] of the Code provides that “[a]ny person required to collect, truthfully account for, and pay over any tax . . . who willfully fails” to do so shall be personally liable for “a penalty equal to the total amount of the tax evaded, or not . . . paid over.” § 6672(a). Although labeled as a “penalty," § 6672 does not actually punish; rather, it brings to the government only the same amount to which it was entitled by way of the tax.  

Personal liability for a corporation's trust fund taxes extends to any person who (1) is "responsible" for collection and payment of those taxes, and (2) "willfully fail[s]" to see that the taxes are paid. 

In addition to the TFRP which is a civil liability only, Section 7202, here, imposes a parallel criminal penalty for those individuals who are responsible within the employer organization to attend to the withholding, accounting for and paying over.

Failure to withhold, account for and pay over is a common phenomenon with businesses encountering cash flow difficulties.  The person or persons within the organization who determine which creditors get paid rob Peter to pay Paul -- i.e., they divert the withheld tax [or deemed withheld] to other creditors (sometimes to themselves).  In many, perhaps most of these cases, they intend only a temporary diversion -- hoping to keep the business afloat, steady the ship, and produce cash flow sufficient to pay the trust fund taxes and any penalties for delinquent reporting and payment.  Sometimes (many times in the aggregate across the economy) the business goes under and the trust fund taxes are not paid.  This sets up the potential for the TFRP and, in some of the more egregious cases, criminal liability under Section 7202.

Tax practitioners deal frequently with clients who are facing IRS action or potential action against them individually for their employer's nonpayment of trust fund penalties.  Often clients will say that the potential civil liability for the TFRP is bad enough, but they certainly don't like the risk of criminal prosecution.  I have had clients ask me if I can illustrate when conduct crosses the line from civil TFRP liability only into potential criminal prosecution.

District Court Case on Brady Obligations and Uncertain Legal Duty (5/30/14)

The name of this case initially attracted me.  United States v. Townsend, 2014 U.S. Dist. LEXIS 70656 (ED WA 2014), here.  It  turns out the defendant is no relation to me.  But the case proved to have some interesting facets.  The first is just an interesting recitation of the Government's Brady obligations.  The second is a more interesting application of the James holding that uncertain legal obligation cannot form the basis for a criminal prosecution.

The defendant was indicted under Section 7202, here, for failing to withhold and pay over on employee's compensation.

Now the issues I report in this blog:

1.  Brady

Brady v. Maryland held "that the suppression by the prosecution of evidence favorable to an accused upon request violates due process where the evidence is material either to guilt or to punishment, irrespective of the good faith or bad faith of the prosecution." 373 U.S. at 87. In United States v. Bagley, 473 U.S. 667 (1985), the Supreme Court disavowed any difference between exculpatory and impeachment evidence for Brady purposes. Despite the Government's argument to the contrary, Bagley also held that regardless of request, favorable evidence is material, and constitutional error results from its suppression by the government, "if there is a reasonable probability that, had the evidence been disclosed to the defense, the result of the proceeding would have been different." 473 U.S. at 682 (it abandoned the distinction between the "specific-request" and "general — or no-request" situations). 

The Ninth Circuit summarized the obligation of the prosecutor concerning Brady material under Kyles v. Whitley, 514 U.S. 419 (1995): 

Moreover, as we have previously held: 

actual awareness (or lack thereof) of exculpatory evidence in the government's hands, ... is not determinative of the prosecution's disclosure obligations. Rather, the prosecution has a duty to learn of any exculpatory evidence known to others acting on the government's behalf. Because the prosecution is in a unique position to obtain information known to other agents of the government, it may not be excused from disclosing what it does not know but could have learned. 

United States v. Price, 566 F.3d 900, 909 (9th Cir. 2009) (citing Carriger v. Stewart, 132 F.3d 463, 479-80 (9th Cir. 1997) (en banc)). The Government correctly notes that Brady is not a discovery rule, but then incorrectly claims the materiality test of Rule 16 and Brady are interchangeable. ECF No. 46 at 5-9. They are not. Rule 16(a)(1)(E)(i) only requires demonstration that the "item is material to preparing the defense" not that it's materiality rise to the level of a reversible Constitutional violation for the failure to disclose it.

I don't know that any of this is new or bold, but it is useful refresher of the Brady obligation.

2.  The Uncertain Legal Duty Issue

Criminal Restitution for Employment Taxes and Trust Fund Liability Under Section 6672 (6/18/13)

In Ross v. United States, 949 F. Supp. 2d 272 (D DC 2013), here, the defendant had been convicted of  tax evasion under Section 7201, here, for failure to pay employment taxes of a corporation he owned. (Note that the other principal felony charge that for nonpayment of employment taxes is Section 7202, here, which is a criminal counterpart to a civil liability for the trust fund portion of employment taxes under Section 6672, here; presumably, the defendant could have been charged under that Section 7202, but was instead charged with evading the corporation's liability for trust fund taxes.)

Pursuant to the plea agreement, the court ordered restitution for the corporation's liability for the employment taxes in the amount of "the actual [employment] tax of $203,651.43 and the resulting interest."

At this point, it is helpful to note the components of employment taxes that were the subject of restitution.  Employment taxes consist of:  (i) withholding income tax from the employees' wages and the employee's share of FICA and Medicare tax, also withheld from the employee's wages, referred to as the trust fund portion; and (ii) the employer's share of FICA and Medicare taxes, referred to as the nontrust fund portion.  (In other words, the trust fund portion is the amounts withheld from employee for remission to the IRS for application against the employee's tax liabilities for income tax, FICA and Medicare tax.  The restitution was for the corporation's employment tax without any differentiation between trust fund and nontrust fund portions.

The plea agreement did not provide as to how the restitution payments would be allocated between trust fund and nontrust fund portions.  Therein lay the rub.  (Outside the criminal context, the standard gambit is to insure, if possible, that taxes paid be applied first to the trust fund portion of the tax liability, but neither the plea agreement nor the restitution order addressed that issue.)

The IRS assessed the Section 6672 penalty, referred to as the trust fund recovery penalty ("TFRP"), against the defendant.  As a result, the defendant obviously preferred that the restitution payments be applied first to the trust fund portion because that was the only portion of the corporation's employment tax liability that he was personally liable for.  That was an issue in the case.