Failure To Pay Over Payroll Taxes Could Land You In Jail - The Sequel

Once again, the IRS has successfully secured the conviction of a business owner who willfully failed to pay over payroll taxes withheld from his employees. In Crabbe v. United States, No. 08-1393, 2010 U.S. App. LEXIS 1931 (10th Cir. Jan. 28, 2010), the U.S. Court of Appeals for the 10th Circuit affirmed the conviction and 37-month sentence of the business owner.

Payroll taxes withheld from employee paychecks are the property of the U.S. government, and are held in trust by employers until such time as they are deposited with the government. If a business fails to deposit payroll taxes, the IRS will seek to recoup them from any "responsible person" of the employer, including officers, directors, owners, or bookkeepers with signature authority over a bank account. The personal liability of such individuals can be substantial, and can include criminal liability under § 7202 of the Internal Revenue Code for "willful" failures to "collect, account for, and pay over" payroll taxes.

In the past, criminal prosecutions under § 7202 were fairly rare, and the IRS was content to seek civil penalties against violators. However, in 2008, the IRS secured the conviction and 30-month sentence of a business owner who failed to pay over a portion of the payroll taxes he collected from his employees to the IRS, because he claimed he needed to money to meet the operating expenses of his business. See United States v. Easterday, 539 F.3d 1176 (9th Cir. 2008) and "Failure to Pay Over Payroll Taxes Could Land You in Jail (http://www.mcguirewoods.com/news-resources/item.asp?item=3503)." As the conviction in Crabbe makes clear, the IRS' use of its prosecutorial powers in Easterday for such violations was no fluke, and business owners need to ensure they are properly remitting payroll taxes to the government.

In Crabbe, the business owner was the vice president of a business that provided nursing services to healthcare facilities. He had no defined duties and was not responsible for the day-to-day management of the company. The business operated by contracting with nurses willing to provide short-term services, and matching them with facilities that had contracted with the business for such services. In doing so, the nurses signed contracts with the business that stated they were employees of the business, that the business was responsible for withholding all applicable payroll taxes, and that it would issue them W-2s for their wages.

In 1999, Crabbe learned that...