Payroll tax problems often begin as cash-flow issues. A business falls behind. Deposits are delayed. A Revenue Officer is assigned. Civil penalties accumulate. In many cases, the matter remains civil and is resolved through payment arrangements or structured enforcement.
But when the government believes payroll taxes were intentionally withheld and not remitted, the situation can escalate dramatically. Under IRC §7202, willful failure to collect or pay over payroll taxes is a felony punishable by up to five years in federal prison per count.
📘 Reference: IRC §7202 – Willful Failure to Collect or Pay Over Tax
What IRC §7202 Covers?
IRC §7202 makes it a felony for any person required to collect, account for, and pay over employment taxes to willfully fail to do so. The statute is primarily used to prosecute “responsible persons”—typically employers or corporate officers—who fail to remit “trust fund taxes,” such as employee income tax withholdings and Social Security (FICA) taxes, to the IRS.
To secure a conviction under § 7202, the government must prove three elements beyond a reasonable doubt:
- Duty – The person had a legal duty to collect, truthfully account for, and pay over the payroll tax.
- Failure – The person failed to collect, truthfully account for, or pay over that tax.
- Willfulness – The failure was a voluntary, intentional violation of a known legal duty.
IRC §6672 vs. IRC §7202
| Category | IRC §6672 | IRC §7202 |
|---|---|---|
| Common Name | Trust Fund Recovery Penalty (TFRP) | Willful Failure to Collect or Pay Over Tax |
| Type of Law | Civil trust fund recovery penalty (TFRP) | Criminal offense (felony) |
| Purpose | Recovers unpaid trust fund taxes from responsible persons. | Punishes willful failure to collect or pay over employment taxes. |
| Applies To | Any “responsible person”(owners, officers, managers, payroll decision-makers) with duty and authority to collect, account for, and pay over trust fund taxes, who willfully fails to do so. | Any person required to collect, account for, and pay over tax who willfully fails to do so. |
| Taxes Covered | Trust fund taxes only (withholding and employee FICA). | Same employment/payroll taxes (withheld income tax + FICA). |
| Mental State | Willfulness – Voluntary, intentional decision to prefer other creditors over the United States or knowingly not remit trust fund taxes. | Willfulness – Voluntary and intentional violation of a known legal duty. |
| Burden of Proof | Civil “preponderance of the evidence” standard. | Criminal “beyond a reasonable doubt” standard. |
| Penalty | 100% of unpaid trust fund taxes | Criminal penalties |
| Potential Consequences | Personal civil liability for trust fund balance. IRS can assess and collect like a tax from responsible individuals. | Up to 5 years imprisonment, fines up to $10,000 (and potentially more under general criminal statutes), plus costs of prosecution. |
| Can Both Apply? | Yes – civil penalty can apply even if criminal charges are not brought. | Yes – criminal charges may accompany or follow civil assessment. |
Penalties and Sentencing Exposure
Conviction under IRC §7202 carries:
- Up to 5 years in federal prison;
- Fines up to $10,000 (and potentially more under general criminal statutes); and
- Costs of prosecution.
The Role of Early Legal Intervention
Early intervention can significantly affect whether charges are filed. When experienced counsel becomes involved during the civil stage, it may be possible to prevent criminal referral by demonstrating corrective action, financial hardship, or lack of willful intent.
Once IRS-CI is formally involved, defense strategy shifts to protecting constitutional rights, controlling communications, and evaluating prosecutorial options.
The earlier counsel is retained, the more options remain available.
Need help with a similar issue? Contact our firm today for a consultation.
Willful failure to pay over payroll taxes under IRC §7202 is a serious federal felony. Early and strategic defense can determine whether charges are filed and what happens next.
Pelham PLLC represents business owners and executives in criminal payroll tax investigations and federal tax litigation.
Contact Pelham PLLC immediately if you suspect criminal payroll tax exposure.
FAQs
What is IRC § 7202?
It is a federal felony that criminalizes the willful failure to collect or pay over payroll taxes.
Who can be charged under IRC §7202?
Anyone responsible for collecting and paying payroll taxes, including owners and officers.
What does “willful” mean under IRC §7202?
A voluntary and intentional violation of a known legal duty.
Can I go to prison for unpaid payroll taxes?
Yes. Conviction under § 7202 can result in up to five years in prison.
Is § 7202 the same as the Trust Fund Recovery Penalty?
No. The Trust Fund Recovery Penalty under RC §6672 is civil, while IRC §7202 is criminal.
Will paying the taxes stop criminal charges?
Not necessarily. Payment may help, but willful conduct can still be prosecuted.
How do IRC §7202 investigations begin?
Often through civil payroll audits that are referred to IRS Criminal Investigation.
Should I speak to IRS special agents without a lawyer?
No. Statements can be used against you in a criminal case.
When should I hire a criminal tax attorney?
Immediately upon contact by IRS-CI or suspicion of criminal referral.
