Trust Fund Tax Convictions Affirmed (4/24/12)

In United States v. DeMuro, 677 F.3d 550 (3d Cir. 2012), here, the Demuros, husband and wife, were convicted of "conspiracy to defraud the United States, in violation of 18 U.S.C. § 371, here,, and 21 counts of failure to account and pay over employment taxes (employee income tax and employee FICA withheld), in violation of 26 U.S.C. § 7202, here.  The facts for the DeMuros were bad, very bad.  Which is the reason that a civil tax matter turned into a criminal prosecution.  I want attempt a comprehensive review.  The  opinion lays the facts and law out well, and at length.

1.  By way of background, employers are required to withhold and pay over income tax and the employee's share of FICA from the pay otherwise due employees.  I am sure that, almost all readers from the U.S., have encountered this system where our paychecks were less because of these withholdings.  The withheld amount is sometimes referred to as a "trust fund" because the employer is deemed to have withheld it from the gross payments and must turn the withheld amounts over to the IRS according to schedules that time the turn to the IRS over depending upon amounts.  The funds so withheld, although described as trust funds, are not required to be segregated by the employer until they are turned over to the IRS.  Nevertheless, the amounts involved are often referred to as trust fund taxes.

2.  Often, particularly in a down economy or even in an up-economy where the employer (or its responsible officers) wants to divert the money to other purposes, employers may raid the withheld trust fund taxes in order to use the amounts to pay other creditors or, even, themselves.  In DeMuro, the employer -- the DeMuro's corporation -- withheld the trust fund taxes from the employees gross pay as the law requires, but they did not pay over to the IS.  It is unclear precisely why they did not pay over, but there was proof at trial of lavish personal expenditures by the DeMuros well beyond the amount of the trust fund withholdings the employer was required to pay over but did not.

3.  The civil enforcement mechanism to "encourage" employers to meet the obligation consists of audits of the trust fund obligation (as well as other potential tax related obligations of the employer).  This includes examination and marshaling the full resources of the IRS, including liens and levies.  Additional encouragements to discourage trust fund defaults are:  (1) so-called trust fund penalty liability under Section 6672, here, for persons in the employer power structure that have responsibility to ensure that the withholding and pay over occur; and (2) Section 7512, here, which authorizes the IRS to give notice to establish a special trust account for the employer to deposit the withheld amounts pending payment to the IRS.  In DeMuro, this latter trust was created.  The proof indicated that the DeMuros wrongfully disbursed some of the monies and shut down the account without the permission of the IRS.