Failure to collect, account for, or pay over withheld employment taxes is a 5-year felony under 26 U.S.C. § 7202. Civilly, owners face the 100% Trust Fund Recovery Penalty under § 6672 — personal liability for the trust portion of unpaid taxes. The IRS prioritizes employment tax cases because the unpaid funds are technically "stolen" from employees.
Employment tax cases are the IRS's top criminal enforcement priority because unpaid withholding harms both the federal fisc and the employees whose Social Security and Medicare contributions go unrecorded. Owners who diverted withheld taxes face simultaneous criminal exposure under § 7202 and personal civil liability under the Trust Fund Recovery Penalty.
The Trust Fund Concept
Federal tax withheld from employee wages — income tax withholding plus the employee share of FICA — is held "in trust" for the United States. The employer's role is custodial: it must collect, account for, and pay over these funds.
Diversion of trust funds for any other purpose — paying suppliers, payroll, the owner's salary, business expenses — is a serious federal crime. The funds are not the employer's to use, even temporarily.
Section 7202 — Criminal Liability
26 U.S.C. § 7202 makes it a felony for any person required to collect, account for, or pay over any tax to willfully fail to do so. Maximum: 5 years imprisonment, $10,000 fine, plus restitution.
The "person" includes:
- Corporate officers responsible for tax compliance;
- CFOs, controllers, and accountants with authority over payroll;
- Owners of unincorporated businesses;
- Outside payroll service providers in some cases.
Each quarter unpaid is a separate offense. Multi-quarter cases routinely produce multi-count indictments.
Section 6672 — Civil Trust Fund Recovery Penalty
26 U.S.C. § 6672 imposes personal liability for 100% of the trust fund portion of unpaid employment taxes on:
- Any "responsible person" — defined broadly to include any individual with authority to direct the payment of company funds;
- Who "willfully" failed to pay — meaning conscious choice to use the money for other purposes.
The TFRP attaches personally — to the individual, not the corporation. Bankruptcy, dissolution, and corporate veil-piercing protections do not apply.
In a typical case, multiple individuals can be assessed: owner, controller, CFO. The IRS pursues all of them and lets them sort out contribution claims among themselves.
Common Charging Patterns
Pyramid Schemes
Owner repeatedly fails to pay employment tax, ignores collection actions, dissolves the business, and starts a new entity — only to repeat. The IRS targets repeat offenders aggressively.
Cash Skimming with Off-Books Payroll
Cash businesses (restaurants, construction, salons) paying portions of wages off-the-books to avoid payroll tax. Often paired with § 7201 evasion for unreported income.
Misclassification
Employees treated as 1099 contractors to avoid employment taxes. Civil liability is automatic; criminal exposure depends on willfulness.
Borrowed-Trust-Funds Pattern
Cash-strapped business diverts withheld taxes to keep operating. Even with intent to eventually pay, this is willful failure under § 7202 and § 6672.
Defenses
Lack of Willfulness
The strongest defense. Willfulness requires conscious choice to divert the funds. Defenses include:
- Reliance on a payroll service or accountant who failed to remit;
- Lack of knowledge that funds were being diverted (in larger organizations);
- Genuine inability to pay despite continued operation;
- Mental health or capacity issues.
Not a "Responsible Person"
For TFRP defense — show that the assessed individual lacked authority over payroll. The IRS uses a multi-factor test (signature authority, hiring authority, financial decision-making) — defendants who lack any factor often prevail.
Statute of Limitations
6 years for § 7202 criminal. No limit for § 6672 civil assessment, but 10 years for collection.
Resolution Options
For pre-indictment matters:
- Voluntary Disclosure Practice — full payment plus interest avoids criminal referral in most cases;
- Installment agreements — civil-side resolution that often satisfies criminal investigators;
- Offer in Compromise — limited use in trust fund cases due to the willfulness issue.
For post-indictment matters:
- Pre-trial diversion — rare in employment tax cases due to IRS priority status;
- Plea to misdemeanor § 7203 if facts permit;
- Cooperation against other responsible parties.
What to Do If You Are Under Investigation or Charged
- Do not speak with IRS Criminal Investigation (CI) agents without an attorney — even informally. Special agents are not auditors; they investigate crimes.
- Do not destroy or alter records — destruction can become obstruction under 18 U.S.C. § 1519 with a 20-year maximum.
- Locate and preserve all bank records, returns, ledgers, emails, and accountant correspondence.
- Discontinue the conduct — but do not amend returns or take corrective action without counsel; both can be used against you.
- Engage federal tax defense counsel immediately — call L and L Law Group at (214) 466-1398, available 24/7.
Frequently Asked Questions
What is the Trust Fund Recovery Penalty?
A 100% civil penalty under 26 U.S.C. § 6672 imposed personally on responsible persons who willfully failed to pay over withheld employment taxes. It attaches to the individual, not the corporation.
Can I be both criminally charged and civilly assessed for employment tax violations?
Yes. § 7202 (criminal) and § 6672 (civil) are separate proceedings with different standards. Criminal acquittal does not preclude civil assessment.
Who is a "responsible person" for the Trust Fund Recovery Penalty?
Any individual with authority to direct corporate payments — typically owners, officers, CFOs, controllers. Ministerial bookkeepers without decision-making authority are usually not responsible persons.
What if my payroll service didn't pay the taxes?
You may have a civil claim against the service, but the IRS still holds you (the employer) liable. Some payroll-service-fraud cases support reasonable-cause defenses, but the IRS rarely accepts them at the civil level.
Can the Trust Fund Recovery Penalty be discharged in bankruptcy?
No. § 6672 penalties are non-dischargeable in personal bankruptcy under 11 U.S.C. § 523(a)(7).
Speak With a Frisco Criminal Defense Attorney
If you or a loved one is facing federal tax crimes charges in Frisco, Collin County, or anywhere in the Dallas-Fort Worth metroplex, the time to act is now. L and L Law Group attorneys are available 24 hours a day, 7 days a week. Call (214) 466-1398 for a free, confidential consultation, or submit your case online and a licensed attorney will contact you directly.
This article is general information, not legal advice. Texas and federal criminal law are complex and fact-specific — please consult a licensed attorney about your particular situation. Past results do not guarantee future outcomes.