18.05[1] Notice of Failure to Collect, Account For, and
Pay
Over
The Internal Revenue Service first must notify the employer of his failure to comply, "by
notice delivered in hand . . . ." 26 U.S.C. § 7512(a)(2). Thus, personal service of the
notice is
required. In the case of a formal business or legal entity, however, service on any corporate
officer
will suffice as notice to all other officers. United States v.
McMullen, 516 F.2d 917, 920 (7th Cir.),
cert. denied, 423 U.S. 915 (1975); United States v.
Stevenson, 540 F. Supp. 93, 96 (D. Del. 1982).
The Internal Revenue Service uses Form 2481, Notice to Make Special Deposits of Taxes,
as the formal notice served pursuant to section 7512. The recipient signs this form as proof of
having
received notice. A defendant can be prosecuted, however, even if there is a refusal to sign the
Form
2481, as long as it is shown that the defendant actually received it.
See United States v. McMullen,
516 F.2d 917, 919 (7th Cir.), cert. denied, 423 U.S. 915 (1975).
Form 2481 sets forth the requirement that the employer open a special trust account in a
bank
for the benefit of the United States and deposit in that account all taxes withheld from wages
within
two banking days after the taxes are collected. 26 U.S.C. § 7512(b). Furthermore, the
employer
must pay over the taxes monthly, instead of quarterly, with the filing of Form 720, Quarterly
Federal
Excise Tax Return, or Form 941M, Employer's Monthly Federal Tax Return. The requirements
set
forth in Form 2481 cannot be waived and remain in effect until the employer receives written
notice
from the District Director cancelling these obligations.
See United States v. Gay, 576 F.2d 1134,
1137 (5th Cir. 1978).
18.05[2] Bank Account For Trust
Deposits
The bank account used for the trust deposits must be designated as a special fund in trust
for
the United States, payable to the United States by the employer as trustee. 26 U.S.C., Sec.
7512(b).
The fact that a defendant had three general bank accounts in his own name does not meet this
requirement. United States v. McMullen, 516 F.2d 917, 920-21
(7th Cir.), cert. denied, 423 U.S.
915 (1975). As a practical matter, however, unless there are unusual circumstances present, an
employer probably should not be prosecuted for failing to establish such a special account, if the
employer has paid the required taxes monthly by filing Forms 720 or 941M. In such a situation,
the
government is receiving its money on a timely basis.
Section 7512(b) requires the employer to make a deposit with each pay period, even
though
the employer does not have to formally pay over the funds to the United States until the end of
each
month. Thus, with every pay period that the employer fails to deposit the withheld taxes to the
trust
account, the employer is committing a violation of section 7215. Otherwise stated, where there
is
a series of failures to deposit over numerous pay periods, each failure is a separate offense and
not
part of one continuing offense. United States v. Paulton, 540 F.2d
886, 893 (8th Cir. 1976).
It is not necessary for the government to prove the exact amount of each deposit required.
The essence of a section 7215 offense is failing to make timely deposits to a trust account. If no
deposits were made at all, then the government need only prove that a deposit was due to show
noncompliance with section 7512 and, therefore, a violation of section 7215.
United States v. Gay,
576 F.2d 1134, 1138 (5th Cir. 1978).
18.05[3] Prior Failures to Pay
A defendant's earlier failures to pay withholding and F.I.C.A. taxes for periods before
those
named in the indictment or information have been held admissible as prior similar acts.
United States
v. Polk, 550 F.2d 566, 568 (9th Cir. 1977). In
Polk, the court stated that such evidence went to the
defendant's state of mind and intent, and, as such, was admissible.
Polk, 550 F.2d at 568. The
holding of Polk is questionable, however, because intent is not an
element of section 7215; it is a
strict liability offense. See Section 18.07, infra. But
see United States v. McMullen, 516 F.2d 917,
921 (7th Cir.), cert. denied, 423 U.S. 915 (1975) (holding evidence of prior tax
deficiencies was
necessary and material, because section 7512(b) is triggered by prior failures to properly collect,
account for, or pay over taxes).
18.05[4] Dates of Payroll Checks
Questions over the dates of employees' checks and the dates that the checks were cashed
are
inconsequential. "It is not material that [payroll] checks may not have been delivered on the
exact
dates appearing thereon or that particular employees may not have cashed their checks
immediately
after receiving them." United States v. Gay, 576 F.2d 1134, 1138
(5th Cir. 1978) (quoting United
States v. Paulton, 540 F.2d 886, 891 (8th Cir. 1976)). The mere fact that some
checks were not
dated on the actual pay days listed in the indictment or information is inconsequential and a
harmless
variance. United States v. McMullen, 516 F.2d 917, 921 (7th
Cir.), cert. denied, 423 U.S. 915
(1975).
18.05[5] Expert Testimony
Excluded
The Fifth Circuit has approved the exclusion of expert testimony at trial concerning the
requirements of section 7512. A defendant's legal obligations under this section are a matter for
the
court's instructions to the jury on the law and are not properly a subject for testimony by an
expert
witness. United States v. Gay, 576 F.2d 1134, 1137 (5th Cir.
1978).
18.06
CIRCUMSTANCES BEYOND CONTROL
Section 7215(b)(2) provides that there is no violation if the defendant "shows" that the
failure
to collect, account for, or pay over the tax was "due to circumstances beyond his control."
Section
7215(b) also provides that a lack of funds existing immediately after the payment of wages,
whether
or not caused by the payment of the wages, "shall not be considered to be circumstances beyond
the
control of a person." The scope of this "circumstances beyond control" exception to the statute
"was
intended to be narrow." United States v. Randolph, 588 F.2d 931,
932-33 (5th Cir. 1979).
The legislative history of section 7215 includes examples of acceptable circumstances
beyond
an employer's control, which would cause a lack of funds after (but not immediately after) the
payment of wages. These include theft, embezzlement, destruction of the business from fire or
other
casualty, and the failure of the bank in which the employer had deposited funds prior to
transferring
them to the trust account for the government. Randolph,
588 F.2d at 933. Conversely, a lack of
funds caused by the defendant taking care of other liabilities and paying other creditors is not
considered a circumstance beyond a person's control and is not a viable defense.
United States v.
Plotkin, 239 F. Supp. 129, 131 (E.D. Wis. 1965).
18.07
INTENT
Section 7215 imposes strict criminal liability for a violation. The government is not
required
to prove any particular mental state, intent, or willfulness, as it must in other criminal tax
violations.
United States v. Dreske, 536 F.2d 188, 196 (7th Cir. 1976);
United States v. Gorden, 495 F.2d 308,
310 (7th Cir.), cert. denied, 419 U.S. 833 (1974); United States v.
Paulton, 540 F.2d 886, 890-91
(8th Cir. 1976); United States v. Erne, 576 F.2d 212, 213-15 (9th
Cir. 1978); United States v.
Stevenson, 540 F. Supp. 93, 97 (D. Del. 1982).
18.08
DEFENSES
18.08[1] Constitutional
Contentions
Sections 7215 and 7512 have been upheld in the face of various constitutional challenges.
The argument that section 7512 is unconstitutional because it does not provide for a prior
administrative hearing before an employer is required to comply with subsection (b) has
been rejected.
United States v. Paulton, 540 F.2d 886, 889 (8th Cir. 1976);
United States v. Patterson, 465 F.2d
360, 361 (9th Cir.), cert. denied, 409 U.S. 1038 (1972); United States
v. Plotkin, 239 F. Supp. 129,
131-32 (E.D. Wis. 1965).
The Eighth Circuit also stated, in Paulton, that the
exceptions appearing in section 7215(b)
do not unconstitutionally place on a defendant the burden of proving his innocence and,
therefore,
do not impermissibly infringe on a defendant's privilege against self-incrimination.
Paulton, 540 F.2d
at 891-92.
Finally, the contention that a sentence of imprisonment for violation of section 7215 is
contrary to the Fifth Amendment of the United States Constitution has been rejected. Defendants
have been unsuccessful in claiming that they were being imprisoned for debt because they were
unable
to pay the taxes. United States v. Gorden, 495 F.2d 308, 310
(7th Cir.), cert. denied, 419 U.S. 833
(1974); United States v. Patterson, 465 F.2d 360, 361 (9th Cir.),
cert. denied, 409 U.S. 1038 (1972).
18.08[2] Selective Prosecution
Courts also have rejected claims of selective, discriminatory prosecution.
United States v.
Erne, 576 F.2d 212, 216-17 (9th Cir. 1978); United States v.
Stevenson, 540 F. Supp. 93, 97-98 (D.
Del. 1982). These holdings, rather than being based on the nature of the statute, simply rested on
the
defendants' failure of proof.
18.08[3] Prior Excess Deposits
Making advance deposits into the trust account, in excess of withheld amounts, for pay
periods prior to those charged, is not a defense to the failure to make the proper deposits for the
pay
periods named in the indictment or information. "To ensure collection of withheld taxes, section
7215 imposes strict compliance with the deposit requirements of section 7512 and any deviation
from
these provisions constitutes an offense." United States v. Gay,
576 F.2d 1134, 1137 (5th Cir. 1978).
Note, however, that evidence of overpayment for prior pay periods may be admissible as proof
that
the defendant had a reasonable doubt as to his obligation to collect taxes in the charged pay
periods,
because he may already have deposited any taxes due. Gay, 576
F.2d at 1137.
18.08[4] Late Payment of Taxes
Evidence of late payments of withholding taxes is no defense, because "the focus of
section
7512 is not eventual payment, but timely payment, and an offense under section 7215 has
nothing
directly to do with payment at all, but with failure to comply with mandatory accounting
procedures,"
which were designed to avoid late payments. United States v.
McMullen, 516 F.2d 917, 921 (7th
Cir.), cert. denied, 423 U.S. 915 (1975).
18.08[5] Lack of Funds
The Seventh Circuit has rejected the defense of lack of funds immediately prior or
subsequent
to the payment of the employer's payroll. United States v.
Dreske,
536 F.2d 188, 195 (7th Cir.
1976). Section 7215 also specifically rejects "lack of funds existing immediately after the
payment
of wages (whether or not created by the payment of such wages)" as being an exception to the
sanctions of the statute.
18.08[6] Embezzlement
Congress has stated that embezzlement is an example of an acceptable circumstance
beyond
a person's control, which may bring the person within the exceptions to section 7215.
United States
v. Randolph, 588 F.2d 931, 933 (5th Cir. 1979); S. Rep. No. 1182, 85th Cong.,
2d Sess. ([1958]
U.S. Code Cong. & Ad. News 2179, 2191-92). The court, in
Randolph, held that there was
insufficient proof to support the embezzlement defense, where the evidence consisted only of a
co-owner of the defendant having been involved with a competitor. The court noted that in order
to assert a viable embezzlement defense, a defendant must prove that the embezzling co-owner
or
employee lied to the defendant about the bank balances at the time the payroll checks were
drawn,
or embezzled the funds after the payroll checks were drawn, leaving insufficient funds to make
the
trust deposits. Embezzlement before payroll checks are drawn would not constitute a defense if
the
defendant knew or should reasonably have known of the embezzlement.
Randolph, 588 F.2d at 933.
18.09
POLICY CONSIDERATIONS
Trust fund cases under section 7215 are one of the categories of criminal tax cases
authorized
by the Department of Justice to be referred directly from the Internal Revenue Service to United
States Attorneys' offices. USAM 6-4.243. This does not mean that such cases should be treated
lightly.
The importance of employer taxes is noted in the Comptroller General's Report to the
Congress, Fictitious Tax Deposit Claims Plague IRS, GGD-81-45, dated April 28, 1981, at pages
1-2:
In fiscal year 1979, employment trust fund taxes accounted for $298
billion (65 percent) of the $460 billion in internal revenue collections.
In IRS' 1979 annual report the Commissioner noted that nonpayment
of taxes withheld from employee's wages is one of the most serious
delinquency problems. IRS initiated collection action against
employers for nonpayment of $2.4 billion in trust fund taxes during
fiscal year 1976, the latest year for which data is available.
Requiring employers to withhold taxes and periodically deposit
them to a Federal bank account facilitates tax collection. In addition,
it avoids the hardships to individual taxpayers of making lump-sum
payments at the end of a year and minimizes the potential for
individuals to avoid tax payment. One problem, however, is that it
gives employers the opportunity to use the withheld taxes for their
own benefit if they do not pay them to the Government. Testifying in
1976 before the Oversight Subcommittee of the House Ways and
Means Committee, IRS officials expressed concern that employers use
the withheld taxes as low-interest loans from the Federal Government.
As noted, the numbers that relate to delinquent employment taxes are in the billions of
dollars,
and the collection of employee income taxes at their source is one of the most important of all the
government's tax-gathering methods. Criminal tax prosecutions of all kinds act as a deterrent to
others, and prosecutions under section 7215, in particular, can act as an aid to the proper
collection
of employment taxes.
18.10
VENUE
The Sixth Amendment of the United States Constitution provides that trials shall be in the
"State and district wherein the crime shall have been committed . . . ." See
also Fed. R. Crim. P. 18.
If a statute does not indicate what Congress considers the location of the crime to be, "the
locus delicti must be determined from the nature of the crime alleged
and
the location of the act or
acts constituting it." United States v. Anderson, 328 U.S. 699,
703 (1946). In section 7215 prosecutions, venue is proper in the judicial district in which the
employer had his place of business or in
which he maintained his special trust bank account, if he ever opened such an account.
See also the discussion of venue in Section 6.00,
supra.
18.11
STATUTE OF LIMITATIONS
The statute of limitations for section 7215 offenses is three years from the date the
defendant
was required to make the deposit to the trust account and failed to do so. 26 U.S.C.
§ 6531.
According to section 7512(b), the deposit must be made by the end of the second banking day
following payday. Where proper deposits have been made but the defendant later withdraws the
funds from the trust account and uses them for purposes other than payment to the IRS, then
presumably the statute of limitations commences to run from the date the defendant made such
withdrawal(s).
See also the discussion of the statute of limitations in Section
7.00, supra.
Footnotes:
1. Changed to 18 U.S.C. § 3571, commencing
November 1, 1986.
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