Failure to collect and pay over federal withholding tax if done willfully, constitutes a crime punishable by up to five years imprisonment. Defending such charges may involve proof of reliance by the business owner upon the advice of an accountant.
The Internal Revenue Service, through its special agents, investigates crimes involving taxes, including the willful failure to collect and pay over what is commonly known as withholding taxes. Title 26 U.S.C. $ 7202 provides imprisonment for up to five years plus a fine of up to $10,000.00 upon conviction. If the IRS believes that it can prove that the defendant acted willfully, it will submit the case to the United States Justice Department for prosecution.
The criminal punishment, including up to five years imprisonment per charge, is in addition to the civil liability upon the business, as well as the person individually. Civil liability includes payment by the business of the amount of tax that should have been withheld from the employees, together with the contribution due from the employer, plus penalties (additional money). The civil impact is that the employer winds up having to pay significantly more money then if the taxes had been properly collected and paid over originally. The business owner and responsible person will also be personally responsible. If prosecuted criminally, the defendant loses his liberty.
Last year, I defended Robert Bishop who was tried on 12 felony counts of willful failure to collect and pay over withholding tax. Each count represented the failure to collect and pay over taxes during a 3 month period. Mr. Bishop did in fact collect and pay over taxes, however, he did not collect and pay over the proper amounts. Because of the 12 felonies, Mr. Bishop potentially could have been sentenced to 60 years imprisonment. Under federal sentencing guidelines if convicted, he would have been in a range of 5 to 6 years of imprisonment.
The defense was based upon a lack of willfulness, that is, Mr. Bishop did not understand his legal duty and therefore, did not intentionally violate that duty as it pertained to the collection and paying over of withholding taxes.
While Mr. Bishop did pay over everything that he collected, he did not collect the right amounts and furthermore, did not collect on certain employees whom he believed to be temporary employees and therefore, incorrectly thought were not subjected to withholding. During the trial the defense was that Mr. Bishop relied totally upon his accountant as to which workers were subjected to withholding and the amounts of withholding to be applied to workers from whom he had to withhold taxes.
What made the defense difficult was the accountant's denial of the advice to Mr. Bishop.
The defense was able to convince the jury that Mr. Bishop did rely on the accountant by discrediting the accountant through cross examination.
The end result of the trial was that Mr. Bishop was acquitted by the jury on all 12 of the felonies. He still faces significant civil penalties, that is the payment of taxes, interest and penalties. He was not however, convicted of a crime and sent to prison.
A lesson that all business owners who are involved in the collection and paying over of taxes and the related filing of quarterly 941 tax returns, must be sure that their accountant is well trained, knowledgeable and has all pertinent information. To protect oneself the business owner should be able to establish what information was provided to the accountant. An accountant may later contend that he or she did not receive all information necessary to prepare the returns properly and did not advise the client as to the withholding issues.
The cross examination of the accountant in the Bishop case by Mark L. Horwitz was included in the publication: Criminal Trial Techniques authored by F. Lee Bailey and Kenneth Fishman and published by Thompson West. The cross examination was included in the yearly supplement and commented on by Mr. F. Lee Bailey.