42 Months Sentence Upheld For Business Owner’s Second Employment Tax Violation

A taxpayer who willfully failed to remit federal employment taxes while in the process of pleading guilty to a nearly identical crime could not escape his above-the-guidelines sentence of 42 months’ imprisonment, the D.C. Circuit recently held.  In United States v. Jackson, the taxpayer committed bankruptcy fraud in 2002 by diverting $373,000 from the company he ran to another one of his businesses, instead of remitting the federal tax withholdings from the wages of the company’s employees.  For this crime, the district court imposed five years’ probation rather than imprisonment.  But the taxpayer did not learn his lesson.  While pleading guilty to this crime and before being sentenced in 2006, the taxpayer, from 2005 through 2009, failed to pay almost $600,000 in federal employment taxes that his other business had withheld from employee wages.  He instead used this money to pay for jewelry, clothing, furniture, and rent.  Caught again, the taxpayer pleaded guilty, this time to willful failure of paying federal employment taxes in violation of Code § 7202, which carries a fine up to $10,000 and up to five years’ imprisonment.

The Department of Justice (DOJ) signed a plea agreement with the taxpayer recommending a U.S. Sentencing Guidelines range of 27 to 33 months.  This agreement was not, however, binding on the district court.  At sentencing, DOJ emphasized that the taxpayer was being sentenced for stealing employment taxes a second time.  Accordingly, the district court imposed 42 months’ imprisonment—9 months more than the top recommended range in the plea agreement.  On appeal, the D.C. Circuit affirmed, reasoning that the taxpayer’s repeat offenses not only demonstrated willful violation of the law, but also proved that a lenient sentence was not sufficient to deter him from committing similar crimes in the future.

As we noted in a prior post, DOJ has been ramping up criminal prosecutions of employment tax violations.  In Jackson, DOJ appears to have prosecuted the case very aggressively by recommending a sentencing range that functioned as an anchor, and then pushing for a harsher sentence.  The district court and the D.C. Circuit ultimately agreed, which reflects not only the seriousness and audacity of the taxpayer’s repeat offenses, but also the principle that using employment taxes held in trust for the government constitutes theft.  This principle is especially noteworthy for businesses that use trust fund taxes to pay other creditors when in dire financial straits, as this practice may now lead to not only civil liability, but also criminal prosecution for those making the decision to divert the funds.  Employers are well served to recognize that trust fund taxes are not their money.