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In United States v. Fecondo (3rd Cir. No. 24-1618 5/26/26) (NonPrecedential), CA3 here and GS here the court held that Fecondo’s crimes of conviction under § 7202 for failure to withhold and pay over the employee share (or portion) of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? 

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:

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.

Tax Notes Today Report of DOJ Tax Comments at NYU Tax Controversy Forum (6/6/15)

Tax Notes Today has a summary of comments made by Government officials at NYU's Tax Controversy Forum in New York. Nathan Richman, Officials Provide Insight Into Swiss Bank Program Penalties, 2015 TNT 109-5 (6/8/15), no link available.

Key summaries of the points I think readers in this forum might be interested in are:

1.  Nanette Davis, a DOJ Tax senior litigation counsel, offered some details of the US DOJ Program for Swiss Banks were discussed.  In order to mitigate the bank's penalty, the bank must show that the accounts are "not-undeclared."  The bank's word as to U.S. compliance is checked against available sources such as OVDP submissions, etc.  This process has "led to some of the banks adjusting their interpretation of Swiss bank secrecy laws, liberalizing their definition of what they can disclose so as to mitigate the penalties."

2. Caroline Ciarolo, DOJ Tax AAAG, said that she expects the Category 2 banks to have their matters completed by the end of 2015.

3.  Davis said that enablers will be "targets."

4.  Davis said that DOJ Tax "is comparing records from the Swiss bank program with streamlined program certifications of non-willfulness and will prosecute those taxpayers it can prove were actually willful."

5.  Davis cautioned taxpayers about quiet disclosures, with the threat that additional enforcement action may follow because (i) the DOJ program is helping identify quiet disclosures and (ii) "the patterns of late returns and FBARs are clear in the data."  The data refererenced in that quote is apparently the data in the IRS records when entering the filing of delinquent or amended income tax returns and delinquent FBARs.

6.  Ciraolo advised that DOJ Tax is increasing criminal enforcement for employment tax issues related to trust fund tax.  Ciraolo singled out for comment employers who failed to pay over the withheld tax and then, on their personal returns, claim the withheld tax credit.

JAT Comment:  Because of all the publicity about Swiss banks' misbehavior, it is not clear whether similar juggernauts will be pursued against banks in other tax jurisdictions whose conduct was equally egregious.

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.

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.

Charging Decisions for Trust Fund Tax Crimes - 7202 or 7201 (12/22/12)

In United States v. Farr, 701 F.3d 1274 (10th Cir. 12/27/12), here, the defendant served as administrator of her late husband's medical clinic.  The clinic did not withhold from its employees (by paying them net of withholding) but failed to pay over the deemed withheld amount to the Government.  The IRS assessed a trust fund recovery penalty (TFRP) under Section 6672, here.  She dilly-dallied.  "When . . . Farr did not pay the penalty assessed against her, a civil proceeding evolved into a criminal one."  The Government then charged her with tax evasion under Section 7201, here.  After some trial level sparring and some appeals, the Government sought a new indictment for tax evasion under Section 7201.  The defendant was convicted.  This appeal ensued.

The key issue in this appeal that I want to discuss is defendant's argument that the conviction should be reversed because the Government improperly charged her for tax evasion under Section 7201 rather than for willful failure to collect and pay over under Section 7202, here.  Her argument, as stated by the Court of Appeals, was:

Farr argues, as she did in her motion to dismiss, that the Internal Revenue Code (IRC) "provides a specific criminal penalty for those responsible for collecting and paying trust fund taxes who willfully fail to do so under § 7202." App. at 29-30. She argues that the indictment should therefore have charged her with violating § 7202 rather than § 7201. In support, she asserts that "[w]hile ordinarily the government is free to charge under whatever statute it deems appropriate under the facts in question, when Congress sets forth provisions governing the duties, penalties, and procedures with respect to specific conduct or individuals as it did in Section[] 7202 . . . , the government may not ignore th[at] provision[] specifically deemed by Congress to be the appropriate vehicle under which to impose prosecution, simply because it favors another better." Id. at 31.

The Court of appeals rejected the argument as follows:

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.