Source: https://taxlitigator.me/2015/11/21/doj-puts-employment-withholding-tax-violations-in-its-crosshairs-by-robert-s-horwitz/
Timestamp: 2019-04-22 00:36:59+00:00

Document:
The failure of businesses to collect and pay to the IRS employee withholding taxes (income, and the employee portion of social security and Medicare) has been a major problem since the institution of withholding taxes. The tax does not get paid to the IRS. At the same time, the employee is credited with having paid the tax. If the amount credited exceeds the amount of tax owed, the employee gets a refund. For the IRS and the Tax Division, failing to collect, account for and pay over withholding tax is theft.
Civil vs. Criminal. The IRS and DOJ have, in the past, relied primarily on the civil trust fund recovery penalty, IRC §6672, to ensure that businesses and their owners and managers comply withhold and pay employment tax to the IRS. This is no longer the case. Since her appointment to the Department of Justice Tax Division, Acting Assistant Attorney General Caroline D. Ciraolo has made the criminal enforcement of employment trust fund tax violations, particularly through IRC §7202, a top priority. She has emphasized that the Tax Division is working closely with both the criminal and civil functions of the IRS in this area. The Tax Division has recently updated the provisions of its Criminal Tax Manual on §7202. See http://www.justice.gov/tax/file/781546/download.
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.
Compare United States v. Gilbert, 266 F.3d 1180 (9th Cir. 2001) (conviction under §7202) with Purcell v. United States, 1 F.3d 932 (9th Cir. 1993) (§§6672 refund case).
Willfulness. At one time, the Ninth Circuit held that willfulness for purposes of §7202 required a voluntary and intentional violation of a known legal duty coupled with a bad purpose or evil motive. See United States v. Poll, 521 F. 2nd 329 (1975). That is no longer the case. The willfulness element under both the civil and criminal penalties is the same. Compare Phillips v. United States, 73 F.3d 939 (9th Cir. 1996) (for purposes of §6672, a responsible person acts willfully if he “knows that withholding taxes are delinquent, and uses corporate funds to pay other expenses, even to meet the payroll out of personal funds he lends the corporation.”) with United States v. Easterday, 564 F.3d 1004, 1005 (9th Cir. 2008) (for purposes of §7202. “if you know that you owe taxes and you do not pay them, you have acted willfully.”).
The reported cases and Tax Division press releases for employment tax prosecutions normally involve businesses that pyramided unpaid payroll taxes over a number of taxable periods. Often, they also involve lavish spending by the defendant during the period the withholding tax was accruing. But neither pyramiding of payroll taxes nor lavish spending by responsible persons is an element of the offense. Ninth Circuit cases make clear that lavish spending is not needed to transform a civil trust fund recovery penalty case into a criminal trust fund case. In Easterday, the Ninth Circuit held that it is no defense that every penny available to the business was used to pay legitimate business expenses. 564 F.3rd at 1011 (evidence “to show how and why he spent money owed to the IRS to pay other business expenses” had no bearing on liability under §7202 and, thus, was irrelevant).
It is increasingly important for tax professionals to advise their business clients about the need to comply with the withholding tax provisions of the Internal Revenue Code and the civil and criminal consequences of noncompliance. In those instances where a business has been noncompliant, you will need to be sensitive to the potential for criminal prosecution when advising the business’s owners and officers, including whether they should agree to be interviewed by the IRS as part of a civil trust fund recovery penalty investigation.

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