Most payroll tax problems begin as civil matters. A business falls behind on deposits. The IRS assesses penalties. A Revenue Officer is assigned. Trust Fund Recovery Penalty investigations follow.
But in certain cases, the government escalates beyond civil enforcement. When the IRS believes payroll taxes were intentionally withheld and diverted, the matter can be referred to IRS Criminal Investigation (IRS-CI). At that point, the issue is no longer about payment plans or penalty abatement. It becomes about potential felony prosecution.
IRS pursuit for unpaid payroll taxes can lead to felony charges under IRC §7202 (willful failure to collect/pay) or IRC §7201 (tax evasion),
📘 Reference:
Understanding IRC §7202 – Willful Failure to Collect or Pay Over Tax
Section 7202 makes it a felony for any person required to collect, account for, and pay over taxes—commonly payroll or withholding taxes—to willfully fail to do so. Violators face up to 5 years in prison, fines up to $10,000, and prosecution costs.
📘 Reference: IRC §7202 (Willful Failure to Collect or Pay Over Tax)
Understanding IRC§7201 – Tax Evasion
Section 7201 is broader and more severe. It criminalizes two types of offenses: (1) willfully attempting to evade or defeat tax assessment (e.g., filing a false return) and (2) willfully attempting to evade or defeat tax payment (e.g., hiding assets). Violations are punishable by up to 5 years imprisonment, fines up to $100,000 for individuals ($500,000 for corporations), and prosecution costs.
📘 Reference: IRC §7201 (Tax Evasion)
Why CPAs Alone Are Not Enough in Criminal Cases?
Criminal tax investigations require defense under attorney-client privilege. Communications with accountants are not automatically protected. Statements made during civil audits can later be used in criminal proceedings.
When criminal exposure is possible, legal counsel must control communications.
When to Hire a Criminal Tax Attorney?
If IRS special agents contact you, request interviews, or serve subpoenas, you should retain counsel immediately. Waiting to see “how serious it is” can irreparably harm your defense.
Early legal involvement often determines whether charges are filed.
📘 Reference: IRS Form 2848, Power of Attorney
Need help with a similar issue? Contact our firm today for a consultation.
Payroll tax problems can cross the line from civil liability to felony prosecution faster than most business owners expect.
Pelham PLLC represents individuals and businesses in IRS criminal investigations, payroll tax defense, and federal tax litigation.
Contact Pelham PLLC immediately if you are facing potential payroll tax criminal charges.
FAQs
What is IRC §7202?
It is a felony for willfully failing to collect or pay over payroll taxes.
What is IRC §7201?
It is the federal tax evasion statute, criminalizing willful attempts to evade tax.
Can unpaid payroll taxes lead to prison?
Yes. Convictions under IRC §7202 or IRC §7201 can result in imprisonment.
What is IRS Criminal Investigation (IRS-CI)?
The division of the IRS that investigates potential criminal tax violations.
Should I speak to IRS special agents without a lawyer?
No. Statements can be used as evidence in a criminal case.
Is every payroll tax problem criminal?
No. Most remain civil, but certain factors increase criminal risk.
When should I hire a criminal tax attorney?
Immediately if IRS-CI contacts you or criminal referral is suspected.
