Employment Tax Fraud

Employment tax fraud charges arise when payroll taxes withheld from employees' paychecks, money held in trust for the government, are diverted to keep a business running instead of paid over. This page covers the statutes federal prosecutors use, who the government treats as responsible, and how these cases are defended, for business owners and officers facing an IRS Criminal Investigation referral or a trust fund interview.

Trust fund money and willfulness

Withheld payroll taxes are trust fund taxes: the employer holds them for the government from the moment of withholding. The matching employer share of Social Security and Medicare sits outside that trust and is treated differently in both the charge and the loss calculation.

Very few of these cases begin as a scheme. The usual pattern is a cash flow squeeze in which taxes are withheld on paper and the money goes to rent, suppliers, or the owner's own salary, the creditors most likely to shut the business down first. What separates a collection problem from a prosecution is proof the decision was willful.

Filing accurate Forms 941 does not change that: Section 7202 is written in the alternative, and courts have held that an employer who reports the liability truthfully and simply never pays it over has still violated the statute.

The statutes prosecutors use

Section 7202 requires proof the defendant was a person required to collect, account for, and pay over withheld taxes, and that the failure was willful. It carries up to five years in prison and fines that can reach hundreds of thousands of dollars.

The Fourth Circuit, which covers Maryland and Virginia, has affirmed convictions in this posture. A 2022 decision upheld a Virginia executive's 36-month sentence after she pulled money from her retirement account to cover delinquent 941 taxes and paid herself and vendors with it instead. A 2026 decision affirmed five-count convictions against a Charlotte software company's CEO and COO, whose withheld taxes went unpaid across five quarters while both kept drawing salaries.

Section 7215 is a narrower misdemeanor that applies only after the IRS hand-delivers a notice requiring a separate trust account for withheld taxes, and willfulness is not an element. Affirmative concealment draws tax evasion charges under Section 7201, and false Forms 941 or doctored payroll records support charges under Section 7206(1) and 7206(2).

Two exposures are easy to overlook. A payroll company handling retirement plan contributions can also be charged under 18 U.S.C. § 664 for the plan money, and false statements made to investigators are their own felony under 18 U.S.C. § 1001.

Who counts as a responsible person

Responsibility follows authority rather than job title. Courts look at who had the practical power to decide which creditors were paid: officers, directors, majority owners, check signers, and controllers. Several people can be responsible for the same quarter at once, and the government does not have to choose among them.

Handing payroll to someone else does not transfer the duty. Owners who step back from daily operations have still been held responsible where they kept ultimate control of the bank account, and once a responsible person learns past quarters went unpaid, exposure keeps building after the discovery rather than freezing at it.

The pivot point is usually the revenue officer's trust fund interview on Form 4180, asking who signed checks, who decided what got paid, and when the delinquency was discovered. Nothing about that conversation is privileged, and a completed 4180 tends to establish both responsible-person status and knowledge at once. What most reliably converts a collection case into a referral is pyramiding, successive unpaid quarters piling up while other creditors keep getting paid.

Defenses to employment tax fraud charges

Willfulness is where most of these cases are won or lost. Under Cheek v. United States, willfulness means the voluntary, intentional violation of a known legal duty, and a genuine good-faith misunderstanding of the law defeats it even if not objectively reasonable. The defense is far stronger before a client has sat through a 4180 interview than after.

• Responsible-person status: contesting the actual scope of authority, particularly for officers with titles but no signature authority
• Reliance on a payroll processor or accountant who failed to remit, which can defeat willfulness until the employer learns the deposits were missed
• Limitations: Section 6531 sets a three-year default with a six-year period for certain offenses, three circuits apply six years to Section 7202, and the Fourth Circuit has not decided the question
• The loss figure itself, since a quarter-by-quarter reconstruction crediting payments actually applied can move the number that drives the sentence

Sentencing and the civil penalty running alongside

Section 2T1.6 of the Sentencing Guidelines sets the base offense level from the amount not collected or paid over, though a cross-reference can send the court to the theft and fraud guideline instead where the employer also failed to account to employees for the withholding.

The civil case does not pause for the criminal one. The trust fund recovery penalty under Section 6672 equals the full trust fund portion, is assessed against responsible individuals personally, and is not an alternative to prosecution. Assessing it after a criminal conviction raises no double jeopardy problem, and restitution and any state withholding exposure continue in parallel.

Why Whiteford

Michael March leads Whiteford's tax controversy and defense practice and has carried employment tax matters through federal criminal proceedings, not just collection. He represented a Virginia business owner prosecuted in the Eastern District of Virginia under Section 7202 for failing to withhold and remit payroll taxes, a matter that concluded with a 15-month sentence against a five-year statutory maximum.

He also represented the owner of a Maryland payroll services company charged under Section 7202 and 18 U.S.C. § 664, who was sentenced to a year and a day and repaid the affected retirement plan participants. Both clients were owner-operators, who these prosecutions almost always target.

On the civil side the firm handles responsible person audits and trust fund assessments. If an IRS special agent, rather than a revenue officer, has already made contact, see IRS special agent investigations. This page is part of Whiteford's criminal tax defense practice.