DOJ Repeatedly Signals Intent to Ramp Up Criminal Prosecutions for Employment Tax Failures

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April 14, 2016

The U.S. Department of Justice has recently proposed amendments to the U.S. Sentencing Commission Guidelines Manual (the “Guidelines”) to sharpen criminal prosecution of willful tax violations. Code section 7202 provides that any person who willfully fails to collect or truthfully account for and pay taxes when required shall be guilty of a felony and, if convicted, subject to a fine up to $10,000 and up to five years’ imprisonment. Since 1987, the background commentary in the sentencing guidelines has stated that Code section 7202 violations are “infrequently prosecuted.” In its annual letter to the Sentencing Commission, the Justice Department explained that defense attorneys have been citing this language to argue for more lenient sentences in Code section 7202 cases. The Justice Department recommended that the sentence be deleted because it is no longer true: Prosecutions have grown from three cases in 2002 to 46 cases in 2014. The Sentencing Commission subsequently recommended that the Guidelines be amended to delete the sentence as a requested.

At a Federal Bar Association Tax Law Conference on March 4, 2016, two attorneys from the Justice Department confirmed that the proposed change reflects the Justice Department’s commitment to employment tax enforcement and is dedicating additional resources to Code section 7202 cases. Employment tax withholdings represent 70 percent of all revenue collected by the Internal Revenue Service, and rampant violations are prompting the U.S. Department of Justice to prosecute employment tax violations more aggressively. Speaking at the Federal Bar Association Tax Law Conference on March 4, 2016, Caroline. D. Ciraolo, the Department of Justice Tax Division Acting Assistant Attorney General, said that the Justice Department will seek more civil injunctions in employment tax cases, which involve employers who fail to collect, account for, and deposit employment wage withholdings. Employers subject to a civil injunction must pay employment taxes on time, notify the IRS when the taxes have been paid, refrain from assigning property to or paying creditors until the taxpayers have paid employment tax obligations accruing after the date of the injunction, and inform the IRS if they establish a new business.

More recently, Noreene Stehlik, a recently appointed Senior Litigation Counsel at the Department of Justice Tax Division, also affirmed the Justice Department’s commitment to employment tax enforcement. At a D.C. Bar Taxation Section conference on April 13, 2016, Stehlik stated that the Justice Department has, in the first quarter of 2016, sought almost as many civil injunctions as it sought in all of 2015. She added that employers not complying with civil injunctions may be subject to criminal prosecution.

The Justice Department’s more aggressive approach seems to embrace the idea that when an employer, payor, or withholding agent makes the decision to use trust fund taxes (i.e., taxes withheld from employees, taxes withheld for backup withholding purposes, and taxes withheld under Chapters 3 and 4 of the Code) to pay other creditors, the use of such funds is tantamount to theft. Businesses that engage in this practice tend to be in dire straits financially and should not make matters worse by using funds held in trust for the government. Engaging in such practices often leads to personal liability for the individuals approving or making the decisions to improperly use the funds, but may also lead to criminal prosecution based upon recent comments from the Justice Department.