The Justice Department has again demonstrated its willingness to prosecute corporate executives for failing to remit employment taxes.  On March 22, 2019, the Department of Justice issued a press release to announce that the U.S. District Court for the Eastern District of North Carolina sentenced a North Carolina man to 30 months in prison, restitution of $1.686 million, and three years of supervised released following completion of his sentence.  The executive served in various official capacities for OneCare, Inc., a mental health service provider, including as the corporation’s President.  From 2010 to 2013, OneCare withheld, but failed to pay over, employment taxes in the amount of almost $1.7 million.  On May 2, 2018, the executive was charged with, among other charges, one count of Willful Failure to Collect or Pay Over Tax.  He ultimately entered into a plea agreement that required him to plead guilty to a single count of Willful Failure to Collect or Pay Over Tax.

This case reinforces the seriousness with which the Justice Department and the IRS regard the obligation to pay over trust fund taxes, which include the taxes required to be withheld (1) from  employees by employers, (2) from third party payees by payors for backup withholding, and (3) from beneficial owners or payees by withholding agents under Chapters 3 and 4.  Further, the courts have demonstrated their willingness to sentence defendants consistent with the recommendations of prosecutors.  In its sentencing memorandum to the court, the trial attorney for the Justice Department recommended 30 to 37 months in prison with a reduced restitution of $1.44 million for defendant’s “acceptance of responsibility.”  Although the court imposed a prison sentence on the low end of the recommended range, it increased the restitution amount by approximately $246K, and added an additional three years of supervised release.

The withholding mechanisms in place under the Internal Revenue Code serve as a backstop for the U.S. federal income tax system.  The Justice Department’s prosecutions in this area should serve as a reminder that (1) the tax law treats employers, payors, and withholding agents as “deputy tax collectors,” and (2) the failure to comply with the tax law in this regard may result in significant consequences, including criminal penalties.