Criminal Tax Manual
9.00 WILLFUL FAILURE TO COLLECT OR PAY OVER TAX
Updated September 2001
9.01 STATUTORY LANGUAGE: 26 U.S.C. § 7202
9.03 Motor Fuel Excise Tax Prosecutions
9.05 STATUTE OF LIMITATIONS
9.01 STATUTORY LANGUAGE: 26 U.S.C. § 7202
§7202. Willful failure to collect or pay over tax
Any person required under this title to collect, account for, and
pay over any tax imposed by this title who willfully fails to collect or
truthfully account for and pay over such tax shall, in addition to other
penalties provided by law, be guilty of a felony and, upon conviction
thereof, be fined* not more than $10,000, or imprisoned not more than five
years, or both, together with the costs of prosecution.
* As to offenses committed after December 31, 1984, the Criminal
Fine Enforcement Act of 1984 (P.L. 98-596) enacted 18 U.S.C. § 3623,
which increased the maximum permissible fines for misdemeanors and
felonies. Where 18 U.S.C. § 3623 [FN1] is applicable, the maximum
fine under section 7202 for offenses committed after December 31, 1984,
would be at least $250,000 for individuals and $500,000 for corporations.
Alternatively, if any person derives pecuniary gain from the offense, or
if the offense results in a pecuniary loss to a person other than the
defendant, the defendant may be fined not more than the greater of twice
the gross gain or twice the gross loss.
This statute describes two offenses: (1) a willful failure to collect; and
(2) a willful failure to truthfully account for and/or pay over. It was designed
primarily to assure compliance by third parties obligated to collect excise taxes
or to deduct from wages paid to an employee the employee's share of Federal
Insurance Contribution Act (FICA) taxes and the withholding tax on wages
applicable to individual income taxes. The withheld sums are commonly referred
to as "trust fund taxes." See Slodov v. United States, 436 U.S.
238, 242-48 (1978); United States v. H.J.K. Theatre Corporation, 236 F.2d
502 (2d Cir. 1956).
To establish a violation of section 7202, the following elements must be
proved beyond a reasonable doubt:
1. Duty to collect, and/or to truthfully account for, and/or pay
2. Failure to collect, or truthfully account for, and/or pay
Cases prosecuted under this statute usually involve social security taxes
(FICA) and withholding tax. The duty of employers to collect, truthfully account
for, and pay over is created by sections 3102(a), 3111(a), and 3402 of the
Internal Revenue Code of 1986. See United States v. Porth,
426 F.2d 519, 522 (10th Cir.1970). Under section 7202, it is the individual(s)
with the duty to collect, truthfully account for, and pay over who is (are)
culpable when there is a failure to perform this duty. A person is responsible
for collecting, accounting for, and paying over trust fund taxes if he has "the
authority required to exercise significant control over the [employer's]
financial affairs, regardless of whether [the individual] exercised such control
in fact." United States v. Jones, 33 F.3d 1137, 1139 (9th Cir. 1994).
For examples of the criteria used to determine the individual with the duty to
collect, truthfully account for, and pay over, see United States v.
Carrigan, 31 F.3d 130 (3d Cir. 1994); Datlof v. United States,
252 F. Supp. 11, 32 (E.D. Pa.), aff'd, 370 F.2d 655 (3d Cir. 1966)
(involving a civil penalty under 26 U.S.C. § 6672 for unpaid federal
withholding and employment taxes).
The Tax Division's position historically has been that either a willful
failure to truthfully account for or a willful failure to pay over is a breach
of the obligation to truthfully account for and pay over. Thus, under this
theory, a willful failure to pay over after the filing of a return making a
truthful accounting leaves the duty as a whole unfulfilled and the responsible
person subject to prosecution. This position is supported by Slodov,
wherein the Court stated that a person could be liable under section 6672, the
civil counterpart to section 7202, if he willfully failed to pay over the tax,
even if he was not associated with the taxpayer-employer at the time the tax was
collected or accounted for. 436 U.S. at 250. In a pre-Slodov case,
United States v. Poll, 521 F.2d 329 (9th Cir. 1975), the Ninth Circuit
suggested a contrary reading of the statute, stating that "[w]e continue to
regard the crime as requiring two failures to act, willful failure to truthfully
account and willful failure to pay over." 521 F.2d at 334-35 n.3
(emphasis in original). Two other circuits that addressed this issue, however,
rejected Poll. See United States v. Thayer, 201 F.3d 214, 220
(3rd Cir. 1999); United States v. Evangelista, 122 F. 3d 112 (2d Cir.
1997). Ultimately, the Ninth Circuit itself agreed with Evangelista and
held that the statement in Poll that section 7202 required both a failure
to truthfully account for and a failure to pay over was dictum. United States
v. Gilbert, No. 00-10314, 2001 WL 1111928 (9th Cir. Sept. 24, 2001).
Gilbert concluded that there is an obligation both to withhold and to pay
over the tax, and that an individual who fails to perform one of these required
duties is subject to conviction under section 7202. Consequently, the court
held that the defendant who had collected and truthfully accounted for the
withholding taxes was nevertheless properly convicted under section 7202 for
willfully failing to pay over the withheld taxes. Thus, Gilbert confirms
the Tax Division's position that a person violates section 7202 if he willfully
fails to collect the tax, willfully fails to truthfully account for the tax,
or willfully fails to pay over the tax.
The requisite element of willfulness under section 7202 is the same as in
other offenses under Title 26. See Section 8.06, supra. It must
be shown that a defendant voluntarily and intentionally acted in violation of a
known legal duty. Cheek v. United States, 498 U.S. 192 (1991); United
States v. Pomponio, 429 U.S. 10, 12 (1976); United States v. Bishop,
412 U.S. 346, 360 (1973). With respect to employment taxes imposed by the
Internal Revenue Code, the legal duty enforced by section 7202 is the obligation
to withhold those taxes from the gross wages of employees, to truthfully account
for those taxes, and to pay over those taxes to the United States Treasury.
Under section 6672, the civil counterpart to section 7202, a voluntary,
conscious, and intentional act of paying the claims of other creditors,
including the wage claims of employees, instead of the trust fund taxes,
constitutes a "willful" violation of the duty to pay over. See
Sorenson v. United States, 521 F.2d 325, 328 (9th Cir. 1975). Similarly,
it is the Tax Division's position that a person willfully fails to pay over tax
under section 7202 when, instead of paying the trust fund taxes, he voluntarily
and intentionally uses the money to pay the claims of other creditors, including
wages to employees, with knowledge that the collected funds are due to be paid
over to the United States.
Evil motive or bad purpose is not necessary to establish willfulness
under the criminal tax statutes. Pomponio, 429 U.S. at 12. In United
States v. Poll, 521 F.2d at 333, a pre-Pomponio case, the Ninth
Circuit held that if an employer-taxpayer lacked the resources to pay the tax at
the time it was due, the Government had the burden of proving "that the lack of
sufficient funds on such date was created by (or was the result of) a voluntary
and intentional act without justification in view of all the financial
circumstances of the taxpayer." The Tax Division believes that Poll's
requirement that the Government must show a lack of justification for the
expenditures that created or caused the lack of funds (a requirement that is
grounded on the premise that the criminal element of willfulness requires an evil
motive or bad purpose, see Sorenson, 521 F.2d at 328 n.3) was
abrogated by Pomponio. Without mentioning Poll, the Ninth Circuit
subsequently agreed with the government that the defendant's act of paying net
wages to his employees, instead of remitting withholding taxes to the Internal
Revenue Service, established a voluntary, intentional violation of section 7202.
United States v. Gilbert, No. 00-10314, 2001 WL 1111928 (9th Cir. Sept.
24, 2001). To prove a willful failure to pay over, all that the government need
show is that payments were voluntarily and intentionally made to creditors other
than the United States with knowledge that the withheld funds were due to the
United States. There is no separate requirement that the Government prove that
the payments were without justification.
For an example of a successful conviction under section 7202, see
United States v. Scharf, 558 F.2d 498, 501 (8th Cir. 1977), where the
court held that evidence that the defendant had altered records was admissible
for the purpose of showing, "motive, intent, and willfulness." For a case in
which the court had no difficulty in concluding that defendant's conduct was
willful in a section 7202 prosecution, see United States v. Bailey,
789 F. Supp. 788, 814 (N.D. Tex. 1992) (failure, for almost a decade, to pay over
taxes withheld from employees' paychecks found to be willful).
9.03 Motor Fuel Excise Tax Prosecutions
Care must be exercised to insure that section 7202 is not applied to those
who have the duty to pay the tax at issue. Section 7202 applies to a person who
is not the taxpayer but is under a duty to collect the tax from the taxpayer, and
then to truthfully account to the government for the collected tax and pay it
Often, the one responsible for paying the tax will pass it on to another,
by, for example, including it as part of the price of goods. But the fact that
the taxpayer "collects" the tax from another in this sense does not mean that he
is responsible under the law for collecting the tax and, thus, potentially
subject to prosecution under section 7202. The practice of passing on the motor
fuel excise tax imposed by section 4081 as part of the purchase price is common
in the motor fuel industry. See Janus Petroleum Co. v. United
States, 915 F. Supp. 556 (E.D.N.Y. 1996); Cook Oil Co. v. United
States, 919 F. Supp 1556 (M.D. Ala. 1996), aff'd, 108 F.3d 344 (11th
Cir. 1997). There is no obligation, within the meaning of section 7202, however,
to collect and pay over these taxes. See United States v.
Musacchia, 955 F.2d 3, 4 (2d Cir. 1991) (vacating defendant's conviction
under section 7202 after being advised by Department of Justice that section 7202
"does not apply to the gasoline taxes at issue here"). Consequently, it is the
position of the Department of Justice that section 7202 charges are not
appropriate in a motor fuel excise tax case.
If a statute does not indicate where Congress considers the place of
committing a 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).
Although no venue cases have been found, venue in a section 7202 prosecution
would appear to be proper in the judicial district in which the defendant was
required to collect or pay over the tax.
For a general discussion of venue, see Section 6.00, supra.
9.05 STATUTE OF LIMITATIONS
The statute of limitations for prosecutions under section 7202 is six years
UNDER 26 u.s.c. § 6531(4). See United States v. Gilbert, No.
00-10314, 2001 WL 1111928 (9th Cir. Sept. 24, 2001); United States v.
Gollapudi, 130 F.3d 66 (3d Cir. 1997); United States v. Evangelista,
122 F.3d 112 (2d Cir 1997); United States v. Musacchia, 900 F.2d 493,
499-500 (2d Cir. 1990), vacated in part on other grounds, 955 F.2d 3
(2d Cir.1991); United States v. Porth, 426 F.2d 519, 522 (10th Cir. 1970);
United States v. Anglin, 999 F. Supp 1378 (D. Haw. 1998). Be aware,
however, that two district courts that have considered the question have
concluded that the statute of limitations for section 7202 prosecutions is three
years. United States v. Brennick, 908 F. Supp. 1004 (D. Mass. 1995);
United States v. Block, 497 F. Supp. 629, 630-32 (N.D. Ga. 1980),
aff'd, 660 F.2d 1086 (5th Cir. 1980).
In the Brennick/Block view, the omission of the language "collect,
account for, and pay over" from the subsections of 26 U.S.C. § 6531, which
establish the longer six-year period of limitations, demonstrates that Congress
did not intend to make the failure to "pay over" third party taxes subject to the
six-year statute of limitations. Brennick, 908 F. Supp. at 1019;
Block, 497 F. Supp. at 630-32. The court also noted in Block,
497 F. Supp. at 632, that section 6531(4) was not directed at a class of offenses
but rather to "the offense of willfully failing to pay any tax." See
Section 7203. The court reasoned that it was "quite clear" that failure to
"pay over" third-party taxes was substantively different from a failure to "pay"
taxes; thus, the exception contained in section 6531(4) was found not to apply
to the failure to pay over third-party taxes. But see Wilson v. United
States, 250 F. 2d 312, 320 (9th Cir. 1958). Likewise, the district court in
Brennick concluded that section 7202 does not describe a section 6531(4)
exception of failing to make any return. Rather, according to Brennick,
section 6531(4) "plainly refers only to a single offense ... clearly described
by the language of Section 7203." 908 F. Supp. at 1019.
The Second Circuit, in Musacchia, reviewed the Block decision
and concluded that that "court's analysis is not convincing." Musacchia,
900 F.2d at 499-500. The Musacchia court found that although 26 U.S.C.
§ 6531(4) does not track the language of section 7202 exactly, the terms
"pay" and "pay over" were used interchangeably by the Supreme Court in deciding
Slodov v. United States, 436 U.S. 238 (1978), and thus the fact that
section 6531(4) uses the term "pay" rather than "pay over" is not dispositive.
The Musacchia court found persuasive the government's argument that
"it would be inconsistent for Congress to have prescribed a six-year limitations
period for the misdemeanor offense defined in 26 U.S.C. § 7203 . . . while
providing only a three-year limitation period for the felony offense defined in
Section 7202." Musacchia, 900 F.2d at 500. The court also noted that the
language of section 6531(4) supports the conclusion that the six-year limitations
period applies in a section 7202 prosecution. Musacchia, 900 F.2d at 500.
To resolve any doubt that Musacchia is still good law after being
vacated in part, the Second Circuit in Evangelista explicitly
"reaffirm[ed] the holding of the original Musacchia opinion that 'a six
year statute of limitations applies to the offense defined by 26 U.S.C. §
7202.'" 122 F.3d at 119 (citations omitted). In so doing, the Second Circuit
also implicitly rejected Brennick, an opinion on which it relies for other
propositions. The Third Circuit in Gollapudi, 130 F.3d 66, also
explicitly rejected Brennick and Block, choosing to rely on the
reasoning in Musacchia. To the Gollapudi court, it was clear that
where Congress intended to limit the applicability of section 6531 exceptions it
unambiguously did so by references to specific sections of the code. See
§§ 6531(5)-(8). Congress also chose to include exceptions to
section 6531 by general descriptions of proscribed conduct. See
§§ 6531(1)- (4). Consequently, "'the language of section
6531(4) -- applying the six-year statute of limitations to the 'offense of
willfully failing to pay any tax, or make any return . . . at the time or times
required by law or regulation' -- suggests that it applied to any of such several
sections of the code that define such an offense," and should not be limited, as
Brennick and Block held, to section 7203. Gollapudi, 130
F.3d at 70-71 (citations omitted).
It is the view of the Tax Division that Gilbert, Gollapudi,
Evangelista, Musacchia, Porth and Anglin are correctly
decided and that the six-year statute of limitations provided for in section
6531(4) is applicable to prosecutions under section 7202.
FN 1. Changed to 18 U.S.C. § 3571, commencing November 1, 1986.