Oftentimes, and particularly during the recent financial crisis years, businesses fall into financial distress, and business owners decide to temporarily, but illegally, “borrow” funds from the IRS by failing to pay over to the IRS the payroll taxes they withheld from their employees’ wages. The more common scenario is that the business never had enough funds to withhold the taxes in the first instance. In most instances, this “borrowing” is for use of the funds in the business to attempt to keep the business afloat during this financial distress. While most businesses continue to timely file their quarterly payroll tax returns, these returns accurately reflect little or no deposits/payments being made toward the liability incurred as reflected on those returns. Unfortunately, this “borrowing” tends to continue through several quarters and perhaps into several years, during which time the business is attempting to get out of financial distress.
It seems that once a business begins to illegally “borrow” these payroll taxes from the IRS, it seldom survives. Frankly, if these delinquencies span into several quarters and even years, in almost all cases, this should signal the ultimate and inevitable failure of the business. It is a tragic ending when a business and its owners have struggled through hard times and financial distress and end up losing the business along with being personally saddled with much of the debts of the business through personal guarantees. Adding to the tragedy, the owners are personally liable for the payroll taxes that have accrued as a result of an assessment of the Trust Fund Recovery Penalty. And adding insult to injury, this tragedy reaches another dimension altogether when the IRS decides to criminally prosecute these owners for willfully failing to pay over these taxes.
With regard to criminal prosecution, it seems that the IRS is now commonly referring to criminal investigation/prosecution garden variety type payroll tax debts that were previously solely and appropriately handled through numerous civil sanctions, mechanisms and procedures that exist to handle, punish and resolve delinquent payroll tax liabilities, including imposing personal liability. Code Sec. 7202 criminalizes and imposes punishment and sanctions against business persons for the willful failure to pay over payroll liabilities. This statute criminalizes the failure of “responsible persons” of a business—persons who have the responsibility and duty to collect and pay over to the government the payroll taxes withheld from the company’s employees’ wages—for “willfully” failing to pay over payroll taxes to the IRS.
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