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Your Legal Corner - Client Alert Blog

Failure to Pay Payroll Taxes to the IRS May Lead to Jail Time

Written By: Melissa C. Marsh, Esq., California Attorney, October 2010 Add to Favorites
In United States v. Easterday, 539 F.3d 1176 (9th Cir. 2008), the Ninth U.S. Circuit Court of Appeal affirmed a conviction and 30-month prison sentence for Mr. Easterday’s willful failure to pay about $20,000 in withheld employee payroll taxes to the Internal Revenue Service (IRS). Easterday operated multiple nursing homes in California. Although Easterday accurately stated the corporation’s tax liabilities in its tax filings, and acknowledged that he repeatedly failed to pay the full amount of payroll taxes due to the IRS, he argued that he did not have the ability to pay because of the corporation's financial troubles. Judge Schroder upheld Mr. Easterday’s conviction and 30 month prison sentence, stating "This case illustrates the enduring truth of Ben Franklin’s sage observation that ‘nothing is certain but death and taxes.’"

In a similar case, Crabbe v. United States, (10th Cir. Jan. 28, 2010), the U.S. Court of Appeals for the 10th Circuit affirmed the conviction and 37-month prison sentence of a business owner. According to the Court, Crabbe was a "responsible person" under I.R.C. § 7202 because he was a corporate officer, and the fact that he was not responsible for the day-to-day management of the company was of no consequence. The Court further noted that although Crabbe tried to rectify the past inaccurate reporting of withheld payroll taxes by completing new tax returns and paying over all the payroll taxes for his entire staff, including nurses who had been misclassified as independent contractors, it was too little too late.

As we all intuitively know, employers are required to withhold from an employee’s wages federal and state income and FICA taxes (a.k.a. payroll taxes). When these funds are taken out of the employee’s paycheck, the employer becomes a fiduciary of the United States government with respect to those withheld taxes. Some employers experiencing financial problems will "borrow" money from their payroll accounts to pay other business related expenses. DON’T DO IT! Even if the money is later repaid, the IRS may seek not only a civil judgment, but also criminal penalties against any “responsible person” of the employer, which may include any officer, director, shareholder (owner), or other person with signature authority on the bank account. I.R.C. § 7202.

Although the IRS rarely sought criminal convictions under I.R.C. § 7202 in the past, that has all changed. The Court’s rulings in both Easterday and Crabbe emphasize the importance of timely remitting payment of payroll taxes owed to the IRS.

Posted In: Corporate Client Bulletin  Tax Update 

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Disclaimer: The information presented on this web site was prepared by Melissa C. Marsh for general informational purposes only and does not constitute legal advice. The information provided in my articles and alerts should not be relied upon, or used as a substitute for professional legal advice from an attorney you retain to advise or represent you. Your use of this Internet site does not create an attorney- client relationship. Transmission of this article is not intended to create, and receipt of it does not constitute, an attorney-client relationship. All uses of the contents of this site, other than personal uses, are prohibited. You may print or email a copy of any information posted on this web site for your own personal, non-commercial, use, but you may not publish any of the articles or posts on this web site without the Express Written Permission of Melissa C. Marsh.

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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.