Two Circuit Courts Rule Six-year Statute Applies to Criminal Prosecution for Failure To Pay Over Trust Fund Taxes
It is not uncommon for a manager of a troubled business to look to withheld employment taxes as a source of ready cash to pay expenses. Usually, it is hoped that the fortunes of the business will improve and the withheld taxes will eventually be paid to the government. Frequently, this does not happen.
The government strongly discourages using withheld employment taxes to pay business expenses or for other purposes. These withheld taxes are considered a "trust fund." Failure to pay over trust fund taxes subjects a "responsible person" to potentially severe penalties.
The civil penalty imposed on a responsible person under IRC §6672 is equal to the entire tax not paid over. This is the most common penalty asserted. Increasingly in recent years, however, the government has been invoking a criminal penalty under IRC §7202, which provides that willful failure to "collect, account for, and pay over" trust fund taxes is a felony punishable by up to five years in prison and a $10,000 fine.
The IRC §6672 civil penalty can be assessed only during the three-year period after the trust fund return (Form 941) was filed. Lauckner v. United States, 68 F.3d 69 (3d Cir. 1995); Jones v. United States, 60 F.3d 584 (9th Cir. 1995). As a defense to recent prosecutions under IRC §7202, several responsible persons have argued that a three-year statute also applies to criminal prosecutions.
IRC §6531(4), which sets criminal statutes of limitations at six years instead of three, applies to any offense involving "willfully failing to pay any tax . . . required by law." The defendants argued that "pay any tax" in IRC §6531(4) applies to taxes imposed directly on them (e.g., their personal income taxes), while "pay over" any tax in IRC §7202 applies to taxes imposed on others (e.g., the trust fund taxes) for which they only have a duty to collect. Two U.S. district courts accepted this argument and concluded that since IRC §6531(4) did not appear literally to apply, prosecutions under IRC §7202 were subject to a three-year statute. United States v. Block, 497 F.Supp. 629 (N.D. Ga. 1980); United States v. Brennick, 908 F.Supp. 1004 (D. Mass. 1995). The Tenth Circuit Court of Appeals, however, had previously come to the opposite conclusion. United States v. Porth, 426 F.2d 519 (1970).
Recently, the weight of the authorities has shifted to a six-year statute for IRC §7202 prosecutions. In United States v. Evangelista, 122 F.3d 112 (2d Cir. 8/13/97), the Second Circuit Court of Appeals, with little discussion, held that a six-year statute is applicable to prosecution for failure to pay over withholding tax. It also held that the filing of an accurate Form 941 without payment of the tax shown thereon was not a defense to criminal prosecution. The responsible person has not only a duty to file a Form 941, but a duty to pay over the tax shown thereon.
Even more recently, in United States v. Gollapudi, 130 F.3d 66 (3d Cir. 11/17/97), the Third Circuit (over a vigorous dissent) agreed with the Second Circuit. The Third Circuit found that there was no distinction for purposes of IRC §6531(4) between failing to "pay" and failing to "pay over" a tax. Moreover, to rule otherwise would result in a three-year statute for this felony, whereas there would be a six-year statute for the misdemeanor (under IRC §7203) of failing to file a return. The majority noted that this seemed unlikely to coincide with Congress' intent.
Thus, all three Circuit Courts that have considered the question now agree that a six-year criminal statute applies to prosecutions for criminally failing to pay over trust fund taxes.
Why were these cases criminal, rather than civil? In Evangelista, the real estate business involved suffered the usual financial reverses, but then the responsible persons started hiding assets and spending some of the trust fund taxes and other monies which could have been used to pay the trust fund taxes on personal expenses. This clearly enraged the government more than in the typical case. In Gollapudi, the responsible persons did not hide or divert the trust fund taxes to personal use. The funds were used to pay corporate operating expenses. However, no Forms 941 were filed for three years. The government felt this was done to avoid detection. The cases suggest that criminal prosecution is most likely when withheld trust fund taxes are hidden or used for personal purposes.
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