In United States v. Easterday, 539 F.3d 1176 (9th Cir. 2008), the Ninth U.S. Circuit Court of Appeal affirmed a conviction and 30-month prison sentence for Mr. Easterday’s willful failure to pay about $20,000 in withheld employee payroll taxes to the Internal Revenue Service (IRS). Easterday operated multiple nursing homes in California. Although Easterday accurately stated the corporation’s tax liabilities in its tax filings, and acknowledged that he repeatedly failed to pay the full amount of payroll taxes due to the IRS, he argued that he did not have the ability to pay because of the corporation's financial troubles. Judge Schroder upheld Mr. Easterday’s conviction and 30 month prison sentence, stating "This case illustrates the enduring truth of Ben Franklin’s sage observation that ‘nothing is certain but death and taxes.’"

In a similar case, Crabbe v. United States, (10th Cir. Jan. 28, 2010), the U.S. Court of Appeals for the 10th Circuit affirmed the conviction and 37-month prison sentence of a business owner. According to the Court, Crabbe was a "responsible person" under I.R.C. § 7202 because he was a corporate officer, and the fact that he was not responsible for the day-to-day management of the company was of no consequence. The Court further noted that although Crabbe tried to rectify the past inaccurate reporting of withheld payroll taxes by completing new tax returns and paying over all the payroll taxes for his entire staff, including nurses who had been misclassified as independent contractors, it was too little too late.

As we all intuitively know, employers are required to withhold from an employee’s wages federal and state income and FICA taxes (a.k.a. payroll taxes). When these funds are taken out of the employee’s paycheck, the employer becomes a fiduciary of the United States government with respect to those withheld taxes. Some employers experiencing financial problems will "borrow" money from their payroll accounts to pay other business related expenses. DON’T DO IT! Even if the money is later repaid, the IRS may seek not only a civil judgment, but also criminal penalties against any “responsible person” of the employer, which may include any officer, director, shareholder (owner), or other person with signature authority on the bank account. I.R.C. § 7202.

Although the IRS rarely sought criminal convictions under I.R.C. § 7202 in the past, that has all changed. The Court’s rulings in both Easterday and Crabbe emphasize the importance of timely remitting payment of payroll taxes owed to the IRS.