WHY YOU SHOULD ALWAYS PAY YOUR PAYROLL TAXES: A PRIMER ON TRUST FUND RECOVERY PENALTIES (PART 2)-CRIMINAL EXPOSURE
By: Kevin Murphy, Esq.
In Part 1, of this blog, we explained and discussed the civil aspects of IRC 6672- the Trust Fund Recovery Penalty (TFRP). At the end of Part 1, we mentioned that the civil statute is virtually identical to the criminal statute. The two statutes are highlighted below:
Section – IRC 6672 (Civil)
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.
Section – IRC 7202 (Criminal)
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.
As you can see, the first part of each are pretty much identical. The problem lies in the second part. Section 6672 creates only a civil liability. Section 7202 is a felony with a prison sentence of up to five years per count. This is alarming, because for virtually the same actions…one person might be civilly liable, while another could face federal criminal charges, all based on prosecutorial discretion. (And still have a civil liability once they get out of prison.)
Our past experience is that prosecutions under Section 7202 didn’t happen very often and were usually add-ons to other charges. And then only in egregious cases. However, that seems to be changing. In public statements, both the IRS Criminal Investigation Division (CI) and the Department of Justice indicated that criminal enforcement of employment taxes would be a priority. The IRS’ “Criminal Investigation 2017 Annual Report” focuses on employment tax crimes, along with terrorist financing and money laundering. Additionally, in 2017, CI launched the National Coordinated Investigation Unit (NCIU). According to the fiscal 2017 report, “The NCIU will pivot CI to a data driven case selection process by developing and managing national initiatives that CI’s executive leadership has approved as high impact and national in scope. One of the four initiatives listed is employment tax prosecutions.
There is significant reason to be concerned with criminal exposure in relation to a payroll tax liability. First, there clearly has been an increase in reported payroll tax prosecutions since the initiative referenced above was launched. Moreover, in November 2016, federal sentencing guidelines were modified. They had previously stated that prosecution under Section 7202 was infrequent. This statement has now been removed.
In addition, here is a sample of recent statements by government officials:
A senior DOJ official speaking at an ABA tax conference: “Facts and circumstances—Including the amount at issue, the particular defendant, and the location and industry involved—could enter into the government’s decision on which tool to use”
And further at the same conference: “You won’t know whether the case that is sitting on your desk is of interest to us on the civil side or the criminal side”
A CI supervisory special agent speaking at a Texas Federal Tax Institute said this regarding a Form 4180 Interview conducted by the IRS, “it’s pretty common to get a confession…or at least some part of a confession” regarding the tax crime.
Finally, the Chief of IRS CI appeared at a tax conference in Miami and said that employment tax deposits are frequently skipped by desperate small business proprietors. He went on to explain that these cases are obligatory for CI, which must develop cases in every district to prevent business people from failing to remit taxes.
All of this puts the practitioner in a difficult position when dealing with a Revenue Officer in what you think is a civil case. If IRS CI considers statements in a 4180 Interview as possible confessions to a crime, what is a practitioner supposed to do? To refuse to cooperate will certainly create problems with a Revenue Officer who is most likely just trying to resolve a collection matter. This undoubtedly will cause the Revenue Officer to ramp up the case and become more aggressive in collection. And it may result in a criminal referral. Lack of cooperation is frequently cited as a factor in a criminal case.
Further, there is no bright line test for determining when a case will go criminal. Obviously, a large dollar amount is an important factor, but it appears that individual discretion on the part of the government official making the decision will play a large part in the process.
If your client is facing large payroll liabilities for multiple quarters, caution must be exercised in submitting to a 4180 interview. You must make your client aware of the potential for criminal exposure. The client should be strongly encouraged to pay down the trust fund liability as quickly as possible. Although, according to the government, the crime occurs when the taxpayer fails to remit, there is obviously less incentive on the governments part to pursue a criminal case when good faith efforts are made to pay down the liability.
The attorneys at Andreozzi Bluestein have extensive experience with civil and criminal trust fund recovery penalties. If you or a client think you may be subject to a civil or criminal trust fund penalty, please call us at any time for a no obligation consultation.
 2016 TNT 225-6 Employment Tax Sentencing Guideline Amended (Section 7202-Willful failure to pay over) (November 18, 2016) (Doc 2016-23011)
 2016 TNT 213-3 Civil and Criminal Employment Tax Cases Difficult to Distinguish (Section 7202- Willful failure to pay over) (November 02, 2016) (Doc 2016-21993)
 2018 TNT 111-5. Civil Employment Tax Cases Can Easily Turn Criminal (Section 6672 – Failure to collect and pay over tax, or attempt to evade or defeat tax: Section 7202- Willful failure to collect or pay over tax (Doc 2018-23591)
 2018 TNT 83-1 News Analysis: NERDS and COPS, Part 2: IRS CI Looking for a Few Good Cases (Doc 2018-17582)
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decision of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult an independent licensed attorney before making any decision or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Andreozzi Bluestein LLP and the recipient.
Any links to other web sites are not intended to be referrals or endorsements of these sites. The links provided are maintained by the respective organizations, and they are solely responsible for the content of their own sites.