Unpaid Employment taxes: Trust Fund liability, Criminal Prosecution

Unpaid employment taxes can subject you to criminal prosecution.  Additionally, you can be subjected to the Trust Fund Recovery Penalty (which is your personal liability for the trust fund portion of the unpaid employment taxes).

The Department of Justice (press release 18-914 – July 12, 2018)  reports that a business man plead guilty to $5 Million Employment Tax Fraud. The business man faces a statutory maximum sentence of 10 years in prison, a period of supervised release, restitution, and monetary penalties.  The business man owned and operated a Discount Pharmacy (a corporation) with multiple locations. As owner, he was determined to be responsible for collecting and paying over the company unpaid employment taxes. However, during the period from 1998 through 2014 the corporation accrued employment tax liabilities of more than $5 million. The taxes were withheld from the employee’s wages; however, the taxes were not paid to the IRS. In over 15 years, only one employment tax return was filed.

The crime was for unpaid employment taxes. The business man / owner used the employment tax funds for such matters as:  wiring over $1 million to his personal bank account, making in excess of $500,000 in stock market investments, spent over $100,000 on his son’s pharmacy school tuition, and purchased over $370,000 of real property in Virginia and North Carolina.  He also used part of the money to purchase a Jeep Grand Cherokee and a jet ski.

The significance of these criminal tax prosecutions is that they are not solely aimed at the specific criminal defendant. The government pursues them to send a message to all taxpayers. If you ignore the message (in this case,  unpaid employment taxes can result in criminal prosecution and jail time), you may become the next target of criminal prosecution. The incentive for the government to prosecute is obvious. At stake are the tens of billions of dollars in lost revenue to the U.S. Treasury. It’s about the money!

Unpaid employment taxes – will not be tolerated

As stated by the Principal Deputy Assistant Attorney General: “Today’s guilty plea sends a clear message that this type of conduct will not be tolerated,”… “Employment tax violations represent tens of billions of dollars in lost revenue to the U.S. Treasury and the Justice Department is committed to prosecuting individuals involved in these tax frauds.”

If you have a business, unpaid employment taxes may subject you to the Trust Fund Recovery Penalty (personal liability). Additionally, you may face Criminal prosecution.   In connection with the unpaid employment taxes, the IRS will request an “interview”.  This “interview” is a very serious matter. Here is why.

Trust Fund Penalty and the  Interview – (copy of form 4180)

In these situations, the IRS will request targeted taxpayer’s, as well as other potential witnesses, to complete an interview form (form 4180). The purpose of the questions is to determine liability (an element of which is “willfulness”). Experience has shown that persons do not understand nor appreciate the significance of their responses.

The IRS representative is not your friend. He or she is there to achieve the objective of targeting as many persons for the liability as possible.  These forms should never be filled out without the aid and assistance of legal counsel.  There is potential criminal exposure.


The serious nature of unpaid employment taxes and the Responsible Person “Interview” (form 4180), is that there exists not only civil liability exposure for the Trust Fund Recover Penalty, but also the potential for criminal prosecution.

As stated by in the U.S. Department of Justice Criminal Tax Manual (copy here 5/2017):

“the primary focus of § 7202 [criminal prosecution] is on taxes required to be withheld from the gross wages paid to employees”.

This is the same subject as the Trust Fund Recovery Penalty (civil liability).

The Criminal Statute, 26 U.S. Code § 7202 – Willful failure to collect or pay over tax, provides:

“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.”

Now, let’s look at  26 U.S. Code § 6672 – Failure to collect and pay over tax, or attempt to evade or defeat tax (The Trust Fund Recovery Penalty – civil liability provision):

“ (a) General rule “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….” (you can read more here)

The use of the same terminology in both the Civil statute and Criminal statute, is cause for concern.

The Trust Fund Interview – a gateway to Civil and Criminal liability

What about your admissions, or making statements, during an interview concerning the Trust Fund Recovery Penalty (civil liability)?  How does the U.S. government view such?  The Department of Justice advises its prosecutors to review form 4180 (interview form) because it “may contain relevant admissions or statements by the defendant” for criminal prosecution.

Alright, you are thinking that the defendant in the above case (18-914) deserved what he got (he used the money for personal gain).

Maybe you are thinking, “My case is different.  I have unpaid employment taxes, but my business is struggling. I am only using the money to keep the business running, keep the doors open, and to help keep the families of my employees in their homes. The government surely wouldn’t go after me for that. Or, would they?” A reality check is in order.

Here is what the Department of Justice Criminal Tax Manual states about your “good faith”:

“A defendant may argue that she was using the withheld tax to pay current expenses so she could keep the company operating and eventually pay the delinquent tax in the future. Although such facts may affect jury appeal and perhaps how the judge views sentencing, if the government proves the defendant voluntarily and intentionally used unencumbered funds to pay creditors other than the United States, the jury may properly convict even if the intentional non-payment of the known trust fund tax liability was motivated by a desire to keep the business afloat. … (in a § 6672 case, the court held that “[i]t is no excuse that, as a matter of sound business judgment, the money was paid to suppliers and for wages in order to keep the corporation operating as a going concern—the government cannot be made an unwilling partner in a floundering business.”).

If you your business has unpaid employment taxes,  consult legal counsel.