Can I Just Pay and Make the Investigation / Prosecution Go Away?

Criminal tax practitioners often are asked early in the representation (and often more than once) whether, if the client under investigation or being prosecuted, simply pays the tax involved -- even with interest and penalties -- will the problem simply go away. The answer that I give to this is no. (Actually, depending upon the facts and if it is early on in the investigation, the answer may be more nuanced than an outright unequivocal no, as I note later in the blog) As I have sometimes explained after giving the answer no, the investigating agent or prosecutor really does not care whether the taxes are ever paid; he or she wants a conviction.

In United States v. Quinn (D. Kansas 2/3/11), the defendant tried to make the case go away by paying the tax. The defendant was prosecuted under § 7202 Willful failure to collect or pay over tax, the criminal analog to the civil trust fund recovery penalty, § 6672. Failure to collect and pay over tax, or attempt to evade or defeat tax (sometimes called the responsible person penalty). After being indicted, the defendant paid the amount for which she was charged and moved to dismiss. The district court denied the motion to dismiss.

As stated by the district court, her argument was:

Defendant argues that, under the text of the statute, she cannot now be found in violation of Section 7202 because, by virtue of her recent payment, she has not "failed to pay over" the trust fund taxes that she collected from her employees. In support of that argument, defendant notes that the statute does not refer to a failure to pay over such taxes by the due date or at the time required by law, thereby distinguishing Section 7202 from the next section in the code, Section 7203, which does include such language. See 26 U.S.C. § 7203 (person who willfully fails to pay any tax or estimated tax, make a return, keep records, or supply information "at the time or times required by law or regulations" is guilty of a misdemeanor). Defendant argues that her interpretation serves the purpose of the statute to assure payment of trust fund taxes, as employers would have a greater incentive to pay over delinquent trust fund taxes if they could immunize themselves from prosecution under Section 7202 by such late payment. Finally, defendant argues that the "rule of lenity" requires adoption of her more-lenient construction of the statute.

The Court rejected the argument for the following reasons (citations omitted from quotes):

1. "Under a common-sense reading' a deadline is required and the most "reasonable and logical" deadline is the due date for payment. 

2. Notwithstanding paragraph 1, the Court declined to embrace the Government argument that "the offense set out in Section 7202 is completed at the due date."  The Court expressed concern that that position does not recognize that "the initial failure to meet that deadline might be justified or inadvertent (not willful)."

3. "Defendant's construction, on the other hand, would seem to make the statute impossible to apply, as there would be no guidance in the statute concerning the point at which the person could no longer immunize herself from prosecution by paying over the amounts due. "

4. The defendant's argument would discourage compliance rather than encourage it. 

5. The inclusion of a deadline in the text of § 7203 and omission of one in the text of § 7202 does not indicate a congressional purpose to not have some deadline apply in § 7202. 

6. Since adoption of the first statutes imposing this criminal liability and the parallel civil liability, no case has adopted this interpretation. JAT Note: This is true, but at least for the parallel civil case interpretation, the payment of the tax by the employer or even another responsible person would relieve the responsible person of the civil penalty liability. That has never been true of the criminal penalty.

7. As noted in the introduction, the unequivocal no answer is subject to nuance. That nuance is that a delinquent payment might address the issue of willfulness, as the district court notes, citing 2 Kenneth E. North, Criminal Tax Fraud § 16.76 (3d ed. 1998); see also Karen Iafe, et al., Ninth Survey of White Collar Crime: Tax Evasion, 31 Am. Crim. L. Rev. 875, 893 (Spring 1994) (which in turn cited Darrell McGowen, Criminal and Civil Tax Fraud 570 (1986). As with all situations where a tax crime is committed by missing the deadline for reporting and/or payment, the subsequent filing of the report / return or payment of the tax can mitigate the chances of prosecution because concern about ability to establish stringent willfulness. The subsequent action, however, must be taken either before the criminal investigation or early on in the criminal investigation before there is an institutional decision to prosecute.  The defendant in Quinn was just too late.

8.  The rule of lenity does not apply because, based on the reasonable construction of § 7202, there was no doubt that Congress intended prosecution even if such late payment was made.