Unpaid or underpaid payroll taxes are generally a civil matter. A taxpayer can resolve the problem by paying the unpaid taxes and any penalties and fines.

Some situations may become criminal cases when the IRS believes or has evidence that unpaid payroll taxes indicate a federal felony.

Individuals who are defined as the “responsible person” are generally the ones who will be held liable for unpaid payroll taxes. This may be, for example, the person who set payroll policy or the person in charge of paying a company's taxes.

What is IRC § 7202?

This section of the Internal Revenue Code establishes when failure to pay payroll taxes becomes a criminal matter. It's more than a simple mistake or accounting error. It's a knowing or willful failure to collect or account for payroll taxes.

Payroll taxes can become a criminal matter partially because the IRS doesn't view payroll taxes as belonging to the taxpayer. Instead, the IRS views these taxes as money that belongs to the government. The taxpayer is holding these funds in trust for the government.

Viewed through this lens, deliberately failing to pay these taxes or engaging in tactics to avoid paying them is a way of stealing from the government.

Any activity that appears to be a deliberate attempt to avoid payroll taxes may result in criminal charges.

Pyramiding, for example, occurs when an employer withholds payroll taxes from employees but doesn't send that money to the IRS. The unpaid taxes pile up, similar to a pyramid.

Taxpayers convicted of criminal activity related to payroll taxes face a fine of up to $10,000, up to five years in prison, or both. The taxpayer will also be required to pay for the cost of prosecution.

What are Defenses to Criminal Charges Related to Payroll Taxes?

The best defense depends on a taxpayer's specific situation. Examples of common defenses to § 7202:

• Showing the defendant lacked actual authority over the company's finances or taxes.
• Providing evidence that establishes the company relied on an accountant's advice.
• Showing that the mistake was the result of an accounting or math error, not a deliberate action.
• Arguing that the six-year statute of limitations has already run.

If you have questions about payroll taxes or how to build a defense against potential criminal charges, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.